Friday 29 Mar 2024
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This article first appeared in Corporate, The Edge Malaysia Weekly, on August 1 - 7, 2016.

MALAYSIA is tightening regulations on the alcohol industry, with a slew of requirements set to be introduced by Dec 1, 2017, some of which, sources say, are expected to weigh on the earnings and operations of local brewers Heineken Malaysia Bhd (formerly Guinness Anchor Bhd) and Carlsberg Brewery Malaysia Bhd.

Following amendments to the Food Act, gazetted on May 27 this year, the government will, among other things,  raise the minimum legal drinking age to 21 from 18 and require alcoholic drinks to have a written health warning — as opposed to pictorial warnings in other markets — on their packaging.

These new regulations, scheduled to take effect in December next year, are meant to stem underage drinking and alcohol abuse. It is understood that the brewers are in dialogue with the relevant regulators over the details of implementation.

But, according to sources, it is the government’s proposal to reintroduce security ink markings on the packaging of locally produced beer and stout that has the brewers up in arms. Sources tell The Edge that the requirement was supposed to come into effect on June 1. However, in early May, during a dialogue between the private sector and the Customs Department, industry representatives raised concerns over the high cost involved. They argued that the higher cost would be passed to the consumer and inadvertently fuel the illegal market — already a major problem for the industry — further.

They also expressed disappointment at not having been consulted earlier on the details of the implementation.

As a result, in June, the Ministry of Finance (MoF) informed the relevant parties that the implementation date for the security ink markings on beer and stout products would be deferred until a “win-win situation” could be found for both the government and industry, sources say.

Heineken Malaysia managing director Hans Essaadi, when asked about the security ink requirement, says:  “We have made our submission and position known to the government and have engaged in constructive dialogue with MoF.” He explains that the security ink system had been previously implemented in 2006 and was discontinued in 2009 as it was “ineffective and came at a high cost to the industry”.

“We are given to understand that the objective of the current proposal to implement such a system is to distinguish between duty paid and contraband products. However, our industry has more than adequate features in place to achieve this objective. As such, security ink is absolutely unnecessary, and will only be an additional burden to the industry and, ultimately, consumers,” he says in an email response to The Edge.

Heineken Malaysia is the market leader in the malt liquor (as beer and stout are collectively known) segment, with an estimated market share of 62%, according to analysts.

Security ink markings are already in use for the local tobacco industry. Cigarette makers have, since 2004, been required by the government to use such markings on their cigarette packaging to help distinguish between duty-paid and illicit products.

Politically-connected Lembah Sari Sdn Bhd holds the contract to supply security labels to the cigarette industry.

The new regulations and possible reintroduction of security markings for the brewery industry will likely hurt sales volume and raise compliance cost for the players, consumer analysts tell The Edge. However, they say the extent of the impact is hard to quantify just yet.

As it stands, analysts have a positive investment stance on the brewery sector, given its attractive yields and resilient earnings amid a tougher economy.

“These definitely [present] headwinds to the sector. They may affect investor sentiment, but in terms of impact on sales volume and earnings, it is hard to quantify as yet as the brewers are keeping relatively mum while they discuss the details with the government.

“Our view is that there may be a short-term impact but it will not be that significant over the long term as they have ample time to come up with strategies and plans to reduce the impact. We feel what will hurt the industry more is any other potential hike in excise duty,” an analyst at a local investment bank says.

On March 1, the government announced a change in the tax structure for alcoholic drinks, effectively raising malt liquor excise duties by 10% to 99%.

Asked whether the upcoming regulations will hurt brewers, Heineken Malaysia’s Essaadi says: “We acknowledge the amendments to the Food Act and the reasons behind the Ministry of Health driving the change. However, we believe that a more holistic solution is required to address concerns of the ministry. We believe education on responsible consumption and eradicating illicit alcohol are more effective ways to deal with their concerns.”

AmInvestment Bank Research, in a June 28 report, maintained its “overweight” stance on the brewery sector, with “buy” calls on both Heineken Malaysia and Carlsberg.

While the report made no mention of the possible security ink marking requirement, AmInvestment says it does not expect the new regulations in the amended Food Act to significantly dent beer and stout volumes or brewers’ earnings, given that they were largely expected.

“The most visible effect would be on the brewers’ advertising and promotional activities, given that many of these are created and targeted at those from 18 years of age. Another impact would be the potentially higher cost from labelling changes (due to the health warning requirement),” it says.

Both Heineken Malaysia and Carlsberg have been reporting earnings that were above analyst consensus estimates for the past few quarters, driven by growing volumes in the malt liquor market, better cost efficiencies and an increasing focus on premium products that offer better margins.

Heineken Malaysia saw a 24% increase in net profit to RM265.7 million for the year ended June 30, while Carlsberg’s rose 2% to RM215.9 million for the year ended Dec 31, 2015. 

“Our positive view on the sector is underpinned by its defensive and resilient earnings profile (decent three-year earnings compound annual growth rate of 5% to 8%) on the back of improving consumer confidence (in the first quarter of this year), stable margins supported by uptrading activities, improving product mixes and potential price increase in the second half of the year, attractive dividend yields of about 6%, and reduced regulatory risk moving forward,” AmInvestment says. 

 

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