Health Minister Dr Dzulkefly Ahmad announced that the government intends to impose standardised cigarettes shelf prices. In the event that shelf prices are increased, we expect legal market volumes to be crippled by an even more rampant illicit market. Furthermore, the government intends to raise the minimum age of purchasing alcohol from 18 to 21. While this is negative for the brewers, we believe there could be implementation challenges which may lead to a less profound impact. We keep our forecasts unchanged as the details of the mooted regulation changes are unclear at current time.

NEWSBREAK

Cigarette shelf prices to be standardised. Health Minister Dr Dzulkefly Ahmad mentioned that the government intends to impose standardised cigarettes shelf prices as soon as November.

Legal alcohol drinking age. The government also intends to increase the minimum age of purchasing alcohol from 18 to 21 years old.

HLIB’s VIEW

On cigarettes... If implemented, we reckon that shelf price standardisation could take the form of price uniformity within each cigarette category as opposed to a single price for all brands. For the uninitiated, cigarette brands are categorised into 3 segments, i.e. premium, aspirational and VFM. Currently, shelf prices differ between brands within the same category (see Figure #1). We think that the price uniformity may be benchmarked against the highest price within each category as it would be “politically sensitive” (from a health perspective at least), for prices to be adjusted downwards post standardisation. Within each category, BAT’s brands are currently not the highest priced ones, implying the likelihood of a price hike for its cigarettes post standardisation. Should this happen, we expect legal market volume to be crippled by an even more rampant illicit market (which currently commands 63% of total market volume) (Figure #2). This is due to the already huge price differential with illicit cigarettes at RM4-5/pack vs legal premium brands of RM17.00-17.20/pack.

On breweries… Theoretically, increasing the minimum age for purchasing alcohol to 21 should result in lower industry volumes due to a smaller pool of legal consumers. However, we feel that the impact of the increased minimum legal drinking age may be less profound in reality given enforcement issues. While not directly an “apple to apple” comparison, the rampant illicit beer trade is anecdotal evidence on how difficult enforcement can be. To recap, an increase in legal drinking age was gazetted in May 2016, but has not been enforced yet.

Forecast. We maintain our forecasts for all the related companies under our coverage as the details of the mooted regulation changes are unclear at this juncture.

Maintain NEUTRAL. While this news is certainly negative for both the tobacco players and breweries, there is insufficient information regarding its implementation to draw a conclusive impact to the stocks under our coverage. As such, we maintain our stock ratings for BAT, Heineken and Carlsberg for now, but caution there could be some downside risk to our TP once more concrete clarity on implementation emerges.

Source: Hong Leong Investment Bank Research - 17 Oct 2018