BAT Upgraded to 'Hold' as Malaysia Legalises Vape Products

British American Tobacco (M) Bhd (BAT) has received an upgrade from at least one local research house following recent developments in the vape business. CGS-CIMB Research has upgraded BAT’s stock to ‘Hold’ from ‘Reduce’ and raised its 52-week stock target price to RM10.16 from RM8.04. As of now, BAT has one ‘Buy’, five ‘Hold’ and five ‘Sell’ calls.

In a significant move over the weekend, the Malaysian government announced that liquid nicotine would no longer be classified as a banned substance. This ends a decade-long question over whether electronic cigarettes and vaporiser products would be legalised. The move has been welcomed by the Malaysian Vape Chamber of Commerce (MVCC), which estimates that 1.5 million people in the country consume vape products.

The Ministry of Finance has signed a gazette notice to amend the Excise Duties Act 1976, permitting the taxation of nicotine vape liquids and gels at 40 sen/ml. This comes after the Health Minister, Dr Zaliha Mustafa, removed nicotine liquid from the list of banned substances under the Poison Act 1952.

The Royal Malaysian Customs Department has instructed the vape industry players to register their vape manufacturing activities by the end of the month, bringing it in line with the new regulations.

CGS-CIMB Research noted that its lack of confidence in BAT's growth prospects was previously due to its inability to enter the vape market and compete with the grey market players in terms of price. However, with the new development, upside risks could come from BAT’s plans to seize market share in the burgeoning vape industry.

According to the research house, the excise duty rate of 40 sen/ml is "palatable," and the fact that vapes have been legalised without having to go through parliament is a relief. The Malaysian Vape Industry Association (MVIA) has lobbied to set the excise duty rate at 40 sen/ml. The research house has conducted numerous channel checks and found that the previous administration's proposal to apply an excise duty of RM1.20/ml could have more than doubled the market prices of some vape liquid refills.

For vape pens, which BAT’s international sister companies sell under their Vuse brand, the 40 sen/ml excise duty may not increase their liquid pods' retail prices by much.

Upgraded to ‘Hold’ from ‘Reduce’ with an increased target price

CGS-CIMB Research has upgraded BAT's stock to 'Hold' from 'Reduce,' with an increased 52-week stock target price of RM10.16.

Liquid nicotine no longer a banned substance

The Malaysian government has ended a decade-long question over the legalisation of electronic cigarettes and vaporiser products by removing liquid nicotine from banned substances.

Vape liquids and gels to be taxed at 40 sen/ml

The Ministry of Finance has signed off a gazette notice to allow nicotine vape liquids and gels to be taxed at 40 sen/ml. The Royal Malaysian Customs Department has instructed the vape industry players to register vape manufacturing activities by the end of the month.

Vape industry’s positive outlook in Malaysia

The new regulations have been welcomed by the Malaysian Vape Chamber of Commerce (MVCC), which estimates that 1.5 million people in Malaysia consume vape products.

Seizing market share in the burgeoning vape industry

Upside risks could come from how BAT plans to seize market share in the burgeoning vape industry.

Excise duty rate set at a “palatable” 40 sen/ml

CGS-CIMB Research notes that for vape liquids and gels, the excise duty rate of 40 sen/ml is "palatable," and it is a relief that the Finance Ministry has acquiesced to the MVIA's lobbying to set the rate at this level. The previous administration's proposal to apply an excise duty of RM1.20/ml could have more than doubled the market prices of some vape liquid refills.

Vuse brand and retail prices

For vape pens, which BAT’s international sister companies sell under their Vuse brand, the 40 sen/ml excise duty may not increase their liquid pods' retail prices by much.

Conclusion

The Malaysian government's recent move to legalise vape products and remove liquid nicotine from the list of banned substances has created a positive outlook for the vape industry. BAT's growth prospects in the vape market have improved, and the company could seize market share in the burgeoning industry. The excise duty rate set at a "palatable" 40 sen/ml has been welcomed by industry players, and it is expected to have a minimal impact on retail prices.