BREWERIES
Solid amid easing regulatory concerns. Volumes have grown at a healthy 6.3% CAGR since the Government held back on beer excise tax hikes in 2007. We believe regulatory risks will stay relatively benign in 2013 for the following reasons: i) Malaysia’s beer duties are already the second highest globally and the steepest by far on a GDP per capita-adjusted basis, ii) liquor consumption in Malaysia is low at 23 litres per capita (excluding the Muslim population), the second lowest in the ASEAN region, and iii) a revamp of the current alcohol tax structure will likely to lead to higher incremental Government tax proceeds as opposed to a beer excise hike.
A tax revamp? Brewers are lobbying the Government to revamp the current alcohol tax structure to better reflect the alcohol content of their beverage. The goal is to have taxes based on alcoholic content rather than volume. Malaysia currently taxes beer of ~5% alcohol by volume (ABV) at RM7.40 per litre. Meanwhile, whiskey, at ~40% ABV, is taxed RM9 per litre, or just 22% more than beer even though its alcoholic content is higher by 700%. Singapore, Thailand, Indonesia, and even the UK are already taxing based on alcohol content instead of volume. The beer producers have no intention of proposing lower beer taxes but actually are seeking tax increases on other alcoholic beverages. This will give the Government other avenues to raise alcohol tax revenue, instead of targeting beer, due to its higher volume.
OVERWEIGHT on Breweries. With no duty hike foreseen for the medium term, we expect the beer manufacturers to register a 4% volume growth in 2013. The sector is enjoying revenue and profit expansion both from growing sales volumes and improved ASPs as a result of a more favourable product mix – drinkers are consuming more higher-priced beers, thus boosting profit margins. We continue to like the sector’s defensiveness as beer consumption tends to be extremely insensitive to GDP growth.
Solid amid easing regulatory concerns. Volumes have grown at a healthy 6.3% CAGR since the Government held back on beer excise tax hikes in 2007. We believe regulatory risks will stay relatively benign in 2013 for the following reasons: i) Malaysia’s beer duties are already the second highest globally and the steepest by far on a GDP per capita-adjusted basis, ii) liquor consumption in Malaysia is low at 23 litres per capita (excluding the Muslim population), the second lowest in the ASEAN region, and iii) a revamp of the current alcohol tax structure will likely to lead to higher incremental Government tax proceeds as opposed to a beer excise hike.
A tax revamp? Brewers are lobbying the Government to revamp the current alcohol tax structure to better reflect the alcohol content of their beverage. The goal is to have taxes based on alcoholic content rather than volume. Malaysia currently taxes beer of ~5% alcohol by volume (ABV) at RM7.40 per litre. Meanwhile, whiskey, at ~40% ABV, is taxed RM9 per litre, or just 22% more than beer even though its alcoholic content is higher by 700%. Singapore, Thailand, Indonesia, and even the UK are already taxing based on alcohol content instead of volume. The beer producers have no intention of proposing lower beer taxes but actually are seeking tax increases on other alcoholic beverages. This will give the Government other avenues to raise alcohol tax revenue, instead of targeting beer, due to its higher volume.
OVERWEIGHT on Breweries. With no duty hike foreseen for the medium term, we expect the beer manufacturers to register a 4% volume growth in 2013. The sector is enjoying revenue and profit expansion both from growing sales volumes and improved ASPs as a result of a more favourable product mix – drinkers are consuming more higher-priced beers, thus boosting profit margins. We continue to like the sector’s defensiveness as beer consumption tends to be extremely insensitive to GDP growth.
TOBACCO
Regulatory risks to intensify in 2013. The Government predictably kept tobacco excise duties unchanged for the second consecutive year in the 2013 Budget announcement in a bid to reduce the prevalent illicit trade as well as provide a people-friendly budget in view of the impending general election. Government authorities nonetheless forced a cigarette price hike a month later when it mandated (calculated as 20% of ex-factory price). We see rising regulatory risk in 2013, especially after the polls, both in terms of pricing as well as non price-related regulatory tightening.
Tepid volume growth. Legal cigarette consumption rose a meagre 1.7% in 9MFY12 despite the first unchanged tobacco duty in nine years and the Government’s cash handouts to the rural poor. We expect legal cigarette volume growth to dip back into negative territory in 2013-2014 in the presence of a tobacco excise duty hike and the absence of feel-good Government cash handouts next year. Legal volumes contracted at an annual rate of 4.1% in 2006-2011. Illicit trade remains worryingly high, with the duty on 3.5 packs out of every 10 packs of cigarette smoked in Malaysia not paid for.
UNDERWEIGHT on Tobacco. We believe regulatory risk will intensify after the impending general election, with a likelihood of tobacco duty being raised again in the 2014 Budget. Further regulatory tightening is in the pipeline, including tar and nicotine content reduction, increased smoke-free areas and larger graphic warning signs. Given the prevalence of substitute products (illicit cigarettes), legal cigarette demand may not be as inelastic to price as it may seem.
Source: OSK
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