How long more the delay?

■ The Royal Malaysian Customs Department has postponed the levying of excise duty indefinitely on electronic cigarette and vaporiser liquid and gel.
■ We are not surprised by this deferment, considering the blowback from vape industry players and consumers over the high duty rate.
■ It is in British American Tobacco’s (BAT) best interest for the government to set a more pragmatic excise rate so that the group can enter the vape race.

Customs postponing vape liquid excise duty

● On 3 Jan 2022, the Royal Malaysian Customs Department announced that it would postpone the excise duty on electronic cigarette’s and vaporiser product’s nicotine-laced liquid and gel. The levy was supposed to begin on 1 Jan 2022. Now, Customs said it would impose the excise duty on “a later date” only, according to The Edge Markets.

No prizes on guessing why the deferment happened

● The news report by The Edge Markets also stated that Customs gave no reason as to why it decided to delay the excise duty charges. Those who have been following the local news may be able to put two and two together from the continuous news flow on vape industry players’ discontentment over the excise duty rate. Even we were negative on the amount that the government had posited at Budget 2022’s tabling.

● The proposed excise duty rate on the vape liquid and gel was RM1.20/ml. It may not seem punishing for closed-system vapes or vape pens, as their gel and liquid are highly durable. However, the issue comes for the other vape variations that require more gel and liquid than the closed-system type. The retail prices of the existing open-system vapes’ liquid bottles can more than double if the RM1.20/ml excise duty is imposed (see our 8 Nov 2021 Company Flash Note, “The ugly side of vape regulation” for more information).

Length of the delay depends on whether the government listens

● In our view, the ideal resolution to the impasse would be for Customs to accede to the vape industry players’ requests to lower the excise duty rate. We think that these industry players were not protesting against the excise duty’s imposition. Rather, we believe that they want the industry to be legitimised and regulated – just that the excise duty should not push up the vape liquid’s retail prices to levels that the
consumers can ill afford.

● However, we are concerned as to whether the government has the will to be pragmatic. Rather than simply revising down the excise duty rate, Customs is postponing the levy indefinitely. Based on our conversations with vape industry players, the government had mulled taxing vape liquid since at least 2015. We feel that the government has to be realistic with setting an excise duty rate that cash-strapped Malaysian smokers and vapers can stomach. In our view, making vapes unaffordable could spawn a whole new black market, just like the one that has devoured much of the cigarette industry in Malaysia.

Reiterate Hold with a DDM-based TP of RM14.38 (COE: 9.4%)

● We fear that this indefinite postponement would place BAT’s plans to distribute vapes in Malaysia in a limbo. However, this delay should be neutral for the group’s prospects, since we believe that vapers would be fiscally burdened by the excise duty rate on vape liquid as proposed by the government.

● Our FY21-23F forecasts and DDM-based TP do not incorporate sales contribution from vapes. A re-rating catalyst is the government revising down the excise duty rate on vape liquid. Downside risks: more down-trading to value-for-money cigarettes, and smokers cutting down their cigarette intake once the economy reopens.