• While the headline is positive that the government may keep excise flat in FY19F, stick prices may still rise post Apr election by c.9%, in our estimate.
  • Such would be in line with the government’s long term plan to reduce smoking which suggests that volume may not necessarily be boosted.
  • GGRM should continue to gain market share on better value for money, while HMSP may continue to balance margin and market share.

Excise tax hikes and tier reduction delay in 2019F?

  • The comment by Ministry of Finance (MoF) that excise could be flat in 2019F may have resulted in unchanged excise expectation, in particular given next year’s budget deficit is a conservative c.1.8% of GDP, the lowest since 2011.
  • The reduction in the number of excise tax tiers from 10 currently to eight in 2019F may also be scrapped for the time being.
  • Whether these policies shall be maintained post Apr-19 general election remain to be seen. We are of the view that the long term plan of discouraging smoking (hence higher selling prices, growing at multiples of inflation rate) and excise tier restructuring (so as to consolidate the number of tobacco companies for improved tax compliance) should remain, albeit side-tracked by politics near term. We maintWe maintain that prices may go up some 9% and tiers reduced to 8 from 10 by YE19F (Fig 1).

Volume recovery may pick up near term

  • Note that a flat excise tax budget may not mean a soft excise tax per stick increases.
  • In 2018, excise budget was targeted at +1% yoy, yet excise tax per stick rose b c.10% yoy. If the latter is delayed, volume should recover faster near term.
  • Long term, cigarette price increases shall remain high as way to discourage smoking.This has been the case since 2016.
  • The tier reduction scheme is also positive as there should be less competition from small tobacco players and cheap cigarettes from the cut in number of tax levels. Big tobacco players will gain more market share, in our view.

GGRM could still benefit more

  • Fewer excise tiers should help boost GGRM’s sales volume in rural areas. Most of the smaller tobacco companies distribute their cigarettes widely in rural areas. As their prices go up, we expect consumers to switch to GGRM’s products instead.

Stay sector Overweight with GGRM as top pick

  • We rate GGRM and HMSP as Adds. We stay sector Overweight.
  • Re-rating catalysts are higher sales volumes. Downside risk is lower purchasing power.
  • HMSP’s share price has been under pressure from market talk that certain stock market indices such as LQ45 may be based on free float instead of market cap. If so, HSMP’s weighting in the said index would decrease from 10.3% to 2.2%.


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