E-Cigarette Regulation Could Boost British American Tobacco's Vuse E-Cigarette Revenue

According to foreign media reports today, Hong Leong Investment Bank Bhd (HLIB Research) is optimistic about the government’s move to regulate the e-cigarette industry, as it would allow British American Tobacco (Malaysia) Bhd (BAT Malaysia) to launch its e-cigarette products (Vuse) and generate additional revenue.

However, the research firm said Vuse’s successful entry into the Malaysian market could be hindered by the wide range of existing e-cigarette products and the sharp increase in prices of e-liquid after excise tax, which may encourage the illicit market.

To recap, under the Federal Government Gazette Excise Duties (Amendment) Order 2023, the government will impose an excise duty of 40 sen per milliliter on electronic cigarette liquids or gels containing nicotine starting April 1.

The government has also removed liquid nicotine used in electronic cigarettes and e-cigarettes from the list of controlled poisonous substances in order to tax e-liquids.

According to the Malaysian E-Vaporisers and Tobacco Alternative Association, the retail value of Malaysia’s e-cigarette industry grew 9.6% from RM2.27 billion in 2019 to RM2.49 billion in 2022. The number of e-cigarette users is estimated at 1.4 million to 1.5 million, compared with about 5 million traditional cigarette users.

The growth in Malaysia’s e-cigarette user base can be attributed to various factors, such as the diversity of flavors, reduced irritating odors, and the perception that smoking them is less harmful to health.

HLIB Research said the potential launch of Vuse would enable BAT Malaysia to capitalize on this growth trend.

“Although the excise duty of RM0.40 per milliliter is lower than the previously proposed RM1.20 per milliliter, our calculations show that the current online selling price of about RM50 for 60ml nicotine e-liquid at 12mg could still rise by 48% to RM74 under full cost pass-through.”

“Since the B40 group includes the majority of smokers in Malaysia (65%), such a price increase may fuel the illicit market.”

“This was evidenced by the unintended consequences of the 42% increase in cigarette excise duty in 2015 (from 28 sen to 40 sen per stick), which caused the illicit market share to surge from 33.8% in 2015 to 63%-64% by 2018.”

“Therefore, whether Vuse can successfully penetrate the Malaysian market remains to be seen,” the bank-backed research firm noted.

HLIB Research maintained its forecasts unchanged, as it is awaiting more information on Vuse’s pricing structure in Malaysia.

HLIB Research said: “Given BAT’s undemanding valuation and 9% dividend yield, we upgrade the stock from Hold to Buy, while maintaining our target price at RM12.35.”