We have BUY ratings on both the brewers as we opine they offer continued exposure to the reopening play via the tourism angle which still has legs to go – Carlsberg (TP: RM30.77) and HEIM (TP: RM31.18). For BAT (BUY TP: RM12.08), we see upside potential to the group's earnings from declining illicits, coupled with its generous dividend yield of 8.6%.

Brewers: stronger financial showing in 2023. Despite the absence of a major football event in 2023 and the fading of pent-up demand, brewers are expected to still post YoY growth in earnings, premised on (i) the absence of the prosperity tax; (ii) full year reflection of ASP hike; and (iii) continued recovery in tourist arrivals. Tourists arrivals have thus far, exceeded the government’s expectations which has led to a revision in targets from 2.0m to 4.5m and to 9.2m (9M22: 5.6m). Nevertheless, this is still a far gap from pre-pandemic levels of 26.1m in 2019, suggesting there is still more legs for the recovery trend to continue into 2023. A key catalyst would be China’s potential reopening in 2023 which seems increasingly likely following loosening of Covid restrictions in stages since Nov-22. To note, tourists from China accounted for 11.9% of tourists pre-pandemic (2019). On the cost front, brewers are relieved by the declining barely and aluminium prices. While there is risk of beer demand slowdown due to inflationary pressures, higher interest rates and softer economic growth in 2023, we expect beer to continue retaining its inelastic properties – after all, it remains one of the cheapest alcoholic drink the market.

Tobacco: return outweighing risk. As mentioned in our BAT update report, the implementation of The Control of Tobacco Product and Smoking Bill 2022 (Tobacco Bill) is expected to be deferred, considering the Tobacco Bill will have to be reintroduced from the first reading in Dewan Rakyat. There is also a chance that the bill's language will be drastically altered – when asked whether GEG will continue to be implemented, Health Minister Dr. Zaliha Mustafa stressed that decision-making cannot be "drastic," but must be "incremental". With this, we reiterate our view that the legislative path of the Tobacco Bill will be challenging. In fact, as investors are well informed about the impacts of GEG on tobacco players, we believe long-term growth is no longer the primary investment goal for investors. Instead, investors will place a greater emphasis on the near-term catalyst drivers (earnings and valuation), which could be sparked by variables like the declining illicit market share and the absence of the Prosperity Tax in 2023.

Budget 2023-2.0. In the case of no major policy changes in the new “Budget 2023- 2.0”, the measures introduced to curb smuggling activities auger well for the sin sector. To recap, government has tightened enforcement against smuggled tobacco and alcoholic beverages by limiting the import of cigarettes and alcoholic beverages to valid ports and limiting trans-shipments of alcoholic beverages to certain ports. These measures are expected to lift tobacco player’s earnings, as the illicit market share still stands at a buoyant level of 56.1% in 3Q22. Same goes for brewers, whose market share of illicit beers is estimated to be around 20% and 80% in Peninsular Malaysia and East Malaysia, respectively, based on an estimation from Confederation of Malaysian Brewers Berhad in 2018.

Forecast. Unchanged.

Maintain OVERWEIGHT. We continue to favour brewers and tobacco players and believe the risk-reward ratio is skewed to the upside due to the combination of respectable earnings growth and undemanding valuations. We have BUY ratings on both the brewers as we opine they offer continued exposure to the reopening play via the tourism angle which still has legs to go – Carlsberg (TP: RM30.77) and HEIM (TP: RM31.18). For BAT (BUY TP: RM12.08), we see upside potential to the group's earnings if the illicit market share continues to fall coupled with its generous dividend yield of 8.6% which should provide downside support.

Source: Hong Leong Investment Bank Research - 22 Dec 2022