This article first appeared in The Edge Malaysia Weekly on April 10, 2023 - April 16, 2023

BRITISH American Tobacco (Malaysia) Bhd (BAT Malaysia), JT International Bhd (JTI Malaysia) and Philip Morris (Malaysia) Bhd (PMM) — the three largest tobacco companies in the country, which collectively hold a 95% market share of the legal tobacco trade — are assessing the market and waiting for a proper regulatory framework to be established before introducing electronic cigarettes (e-cigarettes) or vape products in Malaysia.

On March 31, the Ministry of Health (MoH) ordered the removal of liquids or gels containing nicotine that are used in e-cigarettes and vape products from the list of controlled substances scheduled under the Poisons Act 1952, paving the way for the government to impose excise duty on such liquids and gels. The government has imposed an excise duty of 40 sen per ­millilitre (ml) on these products from April 1.

PMM managing director Naeem Shahab Khan says the company intends to study the market and review the new regulations before deciding on any future commercialisation of smoke-free vape products in Malaysia. PMM launched its non-combustible, heated tobacco product called IQOS in 2018.

Naeem agrees that the new excise duty on nicotine-based liquids or gels will inevitably raise the price of vape products in the market, as with e-cigarettes, potentially leading consumers to obtain illicit products that are cheaper. It is worth noting that e-cigarettes and vape products are currently not regulated, pending the tabling of a new tobacco control bill.

“Therefore, strong enforcement is needed to protect consumers from unregulated products and ensure the illicit market is contained. We hope MoH and the Ministry of Finance (MoF) can look at this issue more holistically. We need regulation that clearly differentiates between combustible and non-combustible products,” says Naeem.

When contacted, BAT Malaysia and JTI Malaysia declined to comment on the potential rollout of any of their e-cigarettes and vape products in Malaysia. On Feb 8, when releasing its financial results for the fourth quarter ended Dec 31, 2022, BAT Malaysia managing director Nedal Salem said the company was planning to launch its tobacco heated product (THP) called glo that month. The product works by heating up instead of burning tobacco, emitting dry vapour instead of smoke.

Local manufacturers that produce liquid or gel products containing nicotine have been given until April 30 to register their manufacturing activities with the Royal Malaysian Customs Department. Last week, MoF said early registration during this prescribed period may prevent manufacturers from being charged with a compound for the offence of late registration, while ensuring comprehensive industry compliance and smooth tax collection by May.

Last Tuesday, Prime Minister Datuk Seri Anwar Ibrahim was reported as saying that Putrajaya is committed to tabling the Control of Smoking Products for Public Health Bill 2023 in the Dewan Rakyat next month. He explained that the government’s plan to table the bill earlier was prolonged “to harmonise the bill with the tax on vape products and e-cigarettes as there were many objections and negative reactions from members of parliament urging the government to relook at certain provisions of the bill”.

The Control of Tobacco Product and Smoking Bill 2022, mooted by former health minister Khairy Jamaluddin, was tabled for first reading last July but it failed to be passed before the 14th parliament was dissolved in October. The bill was controversial and deemed somewhat draconian as it proposed to ban anyone born after a certain year from purchasing smoking-related products, including cigarettes and tobacco and vape products, also known as the generational end game (GEG). It remains to be seen whether the Control of Smoking Products for Public Health Bill 2023 will include the GEG policy.

PMM’s Naeem says: “We agree with the prime minister that a ban is not as effective as proper regulation and strict enforcement. Bans feed the black market and increase access to unregulated products. In relation to the tobacco bill, our hope is that a comprehensive review of the GEG and its potential unintended impacts will be thoroughly considered.”

He urges the government to introduce a science-based policy that “recognises the vast differences between cigarettes and smoke-free products and paves the way for embracing tobacco harm-reduction principles”.

Hong Leong Investment Bank (HLIB) Research says it is positive on the government’s move to regulate the vaping industry as this would allow BAT Malaysia to roll out its vape products such as Vuse and generate additional income.

“However, since tobacco players can introduce their vape products in the Malaysian market only when the government regulates the use of nicotine gels, it would be a matter of how players will successfully penetrate the Malaysian market then, given that vape users are already using products from the grey economy,” it tells The Edge. “Although industry players have long awaited the legalisation of vape in Malaysia, there is the risk of their products not being competitive enough.”

In an April 3 report, the research house said that while there is a lack of information on product offerings and pricing, the legalisation of e-cigarettes and vape products in the country has presented an opportunity for BAT Malaysia to launch its vape products. It cited the findings of the Malaysian Vape Chamber of Commerce that showed Malaysia’s vape industry’s retail value had increased by 9.6% from RM2.27 billion in 2019 to RM2.49 billion in 2022, with an estimated 1.4 million to 1.5 million vape users compared to about five million traditional cigarette users.

“The growth in the number of vape users in Malaysia can be attributed to [the product’s] variety of flavours, decreased pungency and perceived lower health hazard from smoking. The potential rollout of BAT Malaysia’s vaping brand Vuse [which is currently available overseas] would allow the company to capitalise on the growing trend,” says HLIB Research, which upgraded its “hold” call on the stock to a “buy”, with a target price of RM12.35.

BAT Malaysia’s share price had fallen 4.45% year to date to close at RM10.74 last Thursday, giving the company a market capitalisation of RM 3.07 billion.

Meanwhile, UOB Kay Hian Research in a March 3 report ascribed the counter with a “buy” call and target price of RM16.05. The firm pointed out that BAT Malaysia offers “an appealing dividend yield of 9.6% to 10.7% for 2023 to 2025” and that the company’s market share, which stood at 51.6% as at 4Q2022, according to IPSOS Retail Audit Malaysia, should improve this year.

“[This] follows its exercise to consolidate its aspirational premium segment and to focus resources on its key segments, value-for-money and premium,” it added.

As for the impact of the 40 sen excise duty, it should be noted that there are two ways in which nicotine-based vape liquid is measured and sold — by way of pods (closed system) and open system vape liquid. To this end, data from the Malaysian Vape Chamber of Commerce shows that 77% of vape users reportedly buy the open system vape liquid and consume 12.4ml per week, whereas 23% buy pods and use about 5.2ml per week.

CGS-CIMB Research in an April 3 report pointed out that the 40 sen per ml excise duty may not bring about a substantial increase in the retail price of BAT Malaysia’s liquid pods under the Vuse brand, should it be launched in Malaysia. In the absence of the product locally, the research house cites “Nanostix” as an example of a popular vape pen in Malaysia, which apparently sells its 2ml liquid pods for about RM11.25 each.

“Back-of-the-envelope calculations show that the excise duty will raise the pods’ retail value by only 80 sen, or 7.1%,” says CGS-CIMB Research, which upgraded its call on the stock to “hold” from “reduce” and raised the target price to RM10.16 from RM8.04.

“Our FY2023 to FY2025 forecasts for BAT Malaysia are unchanged, since there are no details yet on the group’s plans for its vape venture. However, we raise our DDM-based target price by dialling up our long-term growth rate from 0% to 3%. Previously, our lack of confidence in BAT Malaysia’s growth prospects centred on its inability to enter the vape market and compete with the grey market players in terms of price,” it adds.

Meanwhile, HLIB Research says that although the 40 sen excise duty is lower than the previously proposed RM1.20 per ml, in-house calculations indicate that “12mg (nicotine strength) of 60ml nicotine vape liquid, which currently sells for about RM50 online, could still increase by 48% to RM74 in a full cost-pass-through scenario”.

It adds that since the B40 (bottom 40% income group) makes up the majority of smokers in Malaysia (65%), the price hike could unintentionally fuel an illicit market. This is evidenced by the unintended consequence of the 42% increase in cigarette excise duty in 2015, which raised the price of cigarettes to 40 sen a stick, from 28 sen, and subsequently led to a surge in illicit market share from 33.8% in 2015 to 64% by 2018, it points out.

“Therefore, it remains to be seen whether Vuse can successfully penetrate the Malaysian market as [another factor to consider is] the extensive range of existing vape products in the market. As BAT Malaysia is not revealing any information until the regulation is in place, we have yet to price in Vuse sales in our forecast,” says HLIB Research.

While Putrajaya’s step forward in legalising the use of nicotine-based vape products in Malaysia is welcomed by industry players, much hangs in the balance as they await the government’s regulation on the matter.

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