KUALA LUMPUR: British American Tobacco (M) Bhd (BAT Malaysia) anticipates that the combustible cigarettes segment will face continued challenges due to the growing popularity of vaping and the impact of reduced disposable income.
Hong Leong Investment Bank Bhd (HLIB Research) said while the illicit market share decreased 2.4 per cent year-on-year (YoY) in the second quarter (Q2) of 2023, while the legal industry volume only saw a modest 1.2 per cent increase as the burgeoning vape segment eroded a portion of its potential growth.
The back-backed investment bank further noted that the traditional 70-30 split, wherein 70 per cent of the returned volume flows back to combustible cigarettes, while the remaining to tobacco heating products (THP) and vape after a reduction in the illicit market – has transformed into a more balanced 50-50 ratio since the legalisation of vaping in the first quarter (Q1) of 2023, resulting in a less significant rebound in cigarette sales.
Moreover, BAT Malaysia has witnessed a rise in down-trading activities driven by lower disposable income. Year-to-date (YTD), BAT Malaysia and Philip Morris (Malaysia) Sdn Bhd experienced a decline in market share, losing ground to Japan Tobacco International (JTI) Malaysia. However, specific reasons for this shift were not disclosed, HLIB Research noted.
Further, HLIB Research said that contrary to the firm's previous belief that BAT Malaysia would only launch their VUSE products after the passing of the tobacco bill, the company is launching their disposable vape product, VUSE Go Max, this week.
"This enables BAT Malaysia to capitalise on the growing popularity of vaping in Malaysia.
"However, considering the vast array of vape products already available in the market, it will take time for VUSE Go Max to establish itself, leading to a minimal initial contribution.
"As a result, we make no changes to our earnings forecast. We maintain the Hold call on BAT Malaysia with an unchanged target price of RM9.22," The research firm noted.
The firm said that though BAT Malaysia launched their vape products before the tobacco bill's passing, it is essential to closely monitor this event, as it could bring significant regulatory changes to the vape industry.
Currently, there are no restrictions on advertising, promotion, sponsorship, nicotine content, flavours, distribution channels, or retail locations for the vape industry.
Any restrictive measures implemented in these areas will impact BAT Malaysia's VUSE products, HLIB Research noted.