Same  thing,  different  name.  Japan  Tobacco  (JT)  has  launched  a  global  rebranding initiative  to  rebrand  its  leading  Premium  cigarette  brand,  Mild Seven. Japan's best-selling  cigarette  and  a  rising  star  in  Malaysia,  the  35-year  old  brand will  be  renamed 'Mevius' from  early  February  2013  as  the  company  seeks  to strengthen the brand's popularity outside Japan. Mild Seven's blue colour scheme and logo  will,  however, remain.  The  name  change  is  anticipated  to  propel  the  Asian-centric  brand  into  the European market as European regulators frown upon the term 'mild', which they deem this  as  implying  lower  health  risks. The 'M' and 'S' within 'Mevius' symbolize  the  first letters of 'Mild Seven', while 'EV' and 'IU' represent 'evolution' and 'you and I (JT's relationship  with  its  customers)'.  The  group  will  incur  additional  costs  from  the rebranding in the form of advertising and packaging changes although the greater brand awareness over the longer term should help boost sales volume.

A  "sophisticated'  illicit.  Mild Seven's consumption in  Malaysia  grew  12.5%  y-o-y  in 2QFY12 for a 5.3% market share while Winston sales dipped 2.8%, for a 0.5 ppt market share decline to 11.2%. The deterioration in Value-for-Money (VFM) brand's volume can be  attributed  to  the growing  presence of  an  illegal  local  brand, 'John'.  This  local brand has  been  cannibalizing  volume  from  the  Value-for-Money  segment,  hitting  BAT's Pall Mall even harder. Unlike most illicit cigarettes, 'John' appears to comply with Malaysian tobacco regulations. Its packaging also complies with the Government's pictorial health warning  requirement  and  has  a  security  mark  as  well  as  an  address  (albeit  an inaccurate one). This makes it harder for the authorities to crack down on its distribution and consumption. The brand is believed to be selling at RM3.50 per 20-stick pack.

Maintain  BUY.  We  value  JTI  at  RM7.54,  based  on  our  FCFF  model  (cost  of  equity: 7.5%,  terminal growth:  1.0%).  The  near  term catalyst  remains  the increasing  likelihood of  tobacco  excise  duty  remaining  unchanged  for  a  second  consecutive  year  when  the 2013  Budget  is  announced  next  month.  As the industry's long  term  prospects  remain bleak,  another  excise  duty  hikes  is  likely  to  send  industry  volume  growth  back  into negative territory.

Source: OSK