- An article in a
local daily reported that Batam-based
factories have been producing thousands
of illicit cigarettes for sale in Malaysia.
- While the issue of
high level of illicit cigarettes is not new to the tobacco industry, what surprises
us is Singapore being used as an intermediary port in the contraband
route.
- In Malaysia, the
bulk of illicit cigarettes is typically smuggled into the country from
easilyaccessible entry points along Malaysia’s coastal areas.
- Most of them
originate from IndoChina countries such as Vietnam, Cambodia and Myanmar.
- According to the
article, the manufactured cigarettes are first shipped to Singapore port before
being smuggled out using fake documents via land/sea.
- The duties-not-paid
cigarettes are then sold below the government mandated minimum price of
RM7.00/pack under various brands.
- We understand the
brand names of illicit cigarettes often see a short-life span. This is to avoid
easy detection by custom officials.
- The level of
illicit cigarettes in Malaysia was at a high of 34.8% (Wave 3, Oct-Dec 2011).
While it registered a reduction from its peak of 37.5% back in 2009, illicit
cigarettes remain a threat to material TIV growth.
- TIV expanded by 3%
YoY in 1QFY12, an increase of approximately 0.1 billion sticks mainly attributed
to the status quo in tobacco excise duty at 22sen/stick. No change to our TIV growth
forecast of 0% to -1% for 2012-2013.
- We maintain NEUTRAL
on the industry. Despite the encouraging start, the operating environment
remains tough with regulatory risks of potential hikes in punitive tobacco excise duty, as well as
the recent proposal to halve nicotine levels in cigarettes.
- Maintain HOLD on
both BAT (FV: RM49.10/share) and JTI (FV: RM7.20/share) for decent dividend
yields of 4%-5% per annum.
Source: AmeSecurities
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