According to several media reports yesterday, the Minister of Health, Datuk Seri Dr. S. Subramaniam, has said that the legally mandated floor prices of cigarettes will be raised to RM9.00 (from RM7.00) effective 1 Aug 2015. It was also reported that all public parks and public areas in national parks (ie  campsites,  canopy  walks,  observation  towers)  and  air-conditioned eateries will be gazetted as no-smoking zones and will be implemented by 1 Jan 2016.  (Source: The Star, Berita Harian)

Comments:  We are not surprised by this development as it is in line with the increased initiatives by Malaysia's healthy ministry to rein in smoking habits. We also understand that the Malaysian government plans to fully enforce  the  World  Health  Organisation's  Framework  Convention  on Tobacco Control (WHO FCTC) by Dec 2015.

We believe that raising the legally  mandated  floor  price  would  have  a  neutral  impact  on  British American  Tobacco  (BAT)  as  the  selling  prices  of  their  cigarettes  are already  above  the  newly  introduced  mandated  amount  of  RM9.00.  Note that  the  estimated  market  share  for  the  smaller  legal  players  consists  of less  than  5%  of  the  legal  cigarette  volume.

Nonetheless,  we  view  the smoking  ban  (if  effectively  enforced)  on  public  areas  negatively  as  we believe  that  this  would  reduce  smoking  prevalence  among  consumers (although  at  a  moderate  pace).  We  make  no  changes  to  our  earnings forecast  for  now  pending  further  information  by  the  Government  on  the implementation of the no-smoking areas.

Maintain HOLD with unchanged 12-month  TP  of  RM63.00.

Source: Affin Hwang Capital Research - 31 Jul 2015