• Highlights
• The permanent court of arbitration has ruled against the appeal of Phillip Morris Asia Ltd vs. The Commonwealth of Australia. This is a third rebuke to global tobacco’s defiance on plain packaging laws after its failure to get Plain Packaging Law overturned at the High court of Australia and the WTO. This ruling is a global benchmark that also has significant implications to the Malaysian tobacco industry.

Comment

• History of plain packaging: To recap, Australia’s plain packaging laws were introduced in 2011 as part of a slew of tobacco control policies and measures aimed at decreasing the incidence of tobacco related deaths in the country.
• The laws essentially banned tobacco companies from branding in totality. (No displaying their distinctive colors, designs and logos on cigarette packs). Tobacco products are subsequently packed in standardized pantone 448 C opaque couché (the world’s ugliest color according to market research) packets. (See Figure #2).
• WHO recommendations: According to article 9 & 11 of the WHO framework convention on tobacco control, parties to the treaty are required to have large health warnings (at least 30% of the packet cover, 50% or more recommended)
• Current Malaysian legislation: Under the Control of Tobacco Product Regulations 2004, picture and text health warnings are required to occupy 50 percent of the front and 60 percent of the back of the package which is well above the WHO recommendations (See Figure #3).
• Does it work? Figures from the Australian Bureau of Statistics suggest that there was a general decrease in the smoking rate following the introduction of the plain packaging. The percentage of daily smokers aged 14 and above reduced to 12.8% in 2013 vs 15.1% in 2010. It was also found that the average age that adolescents had smoked their first cigarette had risen from to 15.9 in 2013 vs. 15.4 in 2010.
• Implications to Malaysia: Deputy Health Minister Dato Seri Dr. Hilmi Yahya highlighted back in March that the government plans to table the “Tobacco Products and Cigarettes Bill” in FY18 which amongst other things will also include the introduction of plain packaging in Malaysia.
• The butt end: The domestic tobacco sector is already battling a multitude of headwinds arising from (1) affordability issues amidst a low consumer sentiment environment (2) record incidence of illicits (57.1% as at December 2016) and (3) the vaping industry. Whilst we expect the pie of smokers within the legal industry to continuously shrink in the long run due to such measures; in the short run, the plague of illicits would negate any meaningful intended public health effect as illicits are out of the scope of the law. Sector Impact
• Ceteris paribus this initiative is negative to the sector as the Australian experience suggests. Furthermore, as the Malaysian market is plagued with illicits, any further apprehension of the legal industry would further hurt TIV. Stock

Rating

• With persistent weaker volumes amidst pressures to cost of living and share of market for illicits at an all-time high of 57.1%, we maintain our SELL call on BAT (TP: RM40.55) pending 1H17 results and briefing later this week.

Source: Hong Leong Investment Bank Research - 18 Jul 2017