Malaysia: New Rules Not Expected to Affect Earnings of Local Tobacco Companies

Source from:  The Star Online  01/06/2014

The new rules governing the buying and selling of illicit cigarettes in the country is not expected to have any material impact on the earnings of local tobacco companies, according to analysts and industry observers.

According to a research note by Affin Investment Bank, Malaysia's illicit cigarette trade level stood at 34.5% as at end-2013 compared with 20% in 2002.

"The key culprit for the rampant illegal activities was due to an increase in cigarette prices over the years as a result of higher excise duties.

"We leave our forecast unchanged for now pending updates from management of the tobacco companies relating to the success of this initiative," said Affin, adding that it was maintaining its "underweight" rating on the tobacco sector for now.

Amendments to the Control of Tobacco Product Regulations 2004 under the Food Act 1983, which took effect on Jan 1, stipulate that it is not only illegal to sell cigarettes in packets that do not carry government health warnings and pictures, it is also illegal to buy them.

Under the amendments gazetted last June, the buyer, just like the seller, may face a maximum fine of RM10,000, jail of up to two years, or both.

The new provisions are aimed at checking smuggling of illegal cigarettes into the country.

RHB Research Institute meanwhile said although this was a positive measure in a attempt to curb illicit cigarette trade, it reckons however that the problem will continue to linger given the lack of the enforcement of regulations.

"The recent steep revision in legal cigarette prices (between 14% and 17%) is not helping the situation as well. We are forecasting the industry's sales volume of legal cigarettes to contract by 10% year-on-year in 2014."

An analyst from a local bank-backed brokerage said other than the lack of proper enforcement of the regulations, the various subsidy rationalisation initiatives recently will likely elevate illicit cigarette trade further.

"The higher cost of living from the electricity, fuel and sugar hikes will have the biggest impact on those within the lower-income group, which is also the biggest segment being targeted by illicit cigarette sellers."

Penang Consumer Protection Association president K. Koris Atan, who was the former president of the Malaysia Council for Tobacco Control, says that the "new rules" have actually been in place for some time and has not helped to curb the illicit cigarette trade problem.

"It's been part of the Food Act for umpteen years and till today, our judiciary has yet to fine anyone under the act!" Enditem