This article first appeared in The Edge Malaysia Weekly on December 4, 2023 - December 10, 2023

LAST week, former health minister Khairy Jamaluddin hit out at tobacco and vape companies on social media, sarcastically congratulating them during the tabling of the latest version of the Control of Smoking Products for Public Health Bill 2023 in Dewan Rakyat.

He described the bill as a “big win” for the tobacco and vape companies as the controversial Generational End Game (GEG) provisions were omitted. 

“Congratulations to Big Tobacco and the vape industry. You have won,” he wrote on his Instagram Story.

The implementation of the GEG would definitely be detrimental to tobacco and vape companies, as it essentially puts a cap on the number of years left for them to sell cigarettes and other tobacco and vapour products, one analyst says.

“The majority, if not 90%, of the tobacco companies’ revenue still comes from the sale of traditional cigarettes. With the GEG element now removed from the bill, it is definitely a positive for the incumbent tobacco players in Malaysia. Well, not so much for the health of Malaysians,” says the analyst who declined to be named.

The analyst also points out that with a clear and comprehensive regulatory framework now in place for the entire vape and  electronic cigarette industry, it would help the “Big Three” tobacco players in Malaysia — British American Tobacco (Malaysia) Bhd (BAT Malaysia), JT International Bhd (JTI) and Philip Morris (Malaysia) Sdn Bhd (PMM) — to launch their vapour products and compete in the vaping industry.

The new control of smoking bill will prohibit smokers below the age of 18 from vaping or purchasing vapour products. Clause 13(4) of the bill states that minors who buy tobacco products, smoke substances or substitute tobacco products will be fined not more than RM500 or be ordered to do community service.

The bill will also prohibit the sale of tobacco products, smoking substances or substitute tobacco products to minors. According to Clause 13(2), a person found to have committed the offence will be fined not more than RM20,000 or imprisoned for not more than a year or both.

“The regulation of vapour products will help consumers move to purchase legal vapour products. This will definitely benefit players like BAT Malaysia, JTI and PMM as well as consumers of vapour products as vape companies will soon be required to register their products and list their content with the Ministry of Health (MoH) under the new tobacco law,” she tells The Edge.

The analyst postulates that legal tobacco and vape companies should see higher sales of vapour products with enforcement and regulations on illegal vapour products in place.

“But enforcement has always been an issue in Malaysia. You see this in the cigarette market. There are legal options but because they are expensive, consumers buy and smoke illicit cigarettes that cost a fraction of the price of legal cigarettes and are easily available. If vapour products follow a similar trend and become very much more expensive than the illegal ones they can get, and you have this new control of smoking act but enforcement is still lax for these illegal vapour products, then the vaping industry will run into the same issues,” the analyst says.

Nevertheless, the passing of the Control of Smoking Products for Public Health Bill 2023 has been long in coming. In her winding-up speech last Thursday, Health Minister Dr Zaliha Mustafa was reported as saying that there is an urgent need to close the loopholes in existing laws to ensure that there are comprehensive regulations for all smoking products, including e-cigarettes or vaping.

“Under this bill, there are additional provisions such as registration requirements for all smoking products, a ban on the sale and advertising of artificial smoking products and provision of acute or critical situations that are not in the existing regulations.

“The existing Control of Tobacco Product Regulations 2004 under the Food Act 1983 is not sufficient to control new smoking products (e-cigarettes and vape),” she said.

Vape players have for years urged the government to regulate the industry. However, Khairy’s attempts to include the GEG provisions in the bill had resulted in delays to regulating the vaping industry. The GEG element had garnered much industry concern and comment as it would mean any Malaysian born on or after Jan 1, 2007, would not be able to purchase cigarettes and other tobacco and vaping products. Currently, anyone who turns 18 can buy tobacco products.

The bill was finally passed last Thursday after the cabinet decided to decouple the GEG from the latest version of the control of tobacco bill, on the attorney-general’s advice that the generational tobacco and vape ban is unconstitutional.

“What a waste it was when such good legislation is tied to a ‘GEG or nothing’ dichotomy,” Deputy Investment, Trade and Industry Minister Liew Chin Tong wrote on his Facebook late last week.

“Passing the control of tobacco bill now, even without the GEG, is a great start to a much tighter control over the use of tobacco. The GEG can be put forward later with more consultations and acceptance among the public,” he said, adding that New Zealand, the world’s first country to pass GEG legislation, recently announced it would abolish GEG after a new government was sworn in.

“I hope all in policymaking and in law-making [will] be prepared to legislate on common ground and take a gradualist approach while allowing much newer ideas like GEG to be tested in public debates for a longer time,” said Liew.

Nedal Salem, managing director of BAT Malaysia, says the company has always maintained that the GEG proposal is untested, unproven and without scientific evidence as to its effectiveness and may prove counter-productive, not to mention dangerously detrimental to Malaysia’s public health agenda. Even countries like New Zealand are reviewing its decision on this matter, he notes.

“Given the immense 55% of tobacco black market in Malaysia, such a ban will worsen the illegal cigarette crisis without reducing overall cigarette consumption. With one in two cigarettes sold in Malaysia being illicit, this translates into the government losing RM5 billion a year in revenue and black market cigarettes potentially falling into the hands of minors.

“Instead of this scenario, adopting progressive tobacco harm reduction policies and providing access to alternative products with reduced risk to smoking that have been adopted in developed nations is the key to getting smokers to switch. We believe that greater success in reducing the health impact of smoking can be achieved by a regulatory framework that offers adult consumers a choice of science- and evidence-based smoking alternatives,” he says in an email reply to The Edge.

Salem deems the passing of the control of tobacco bill “a step in the right direction” as it will enable a much-needed legislation to regulate vapour products.

“Currently, vapour products are unregulated in the market and a sensible regulatory framework is needed to ensure vapour users have access to regulated products that are compliant with quality and safety standards and that do not fall into the hands of minors,” he adds.

Salem says BAT Malaysia is of the view that the use by and sale of these products to the underaged must be prohibited. “We take this matter seriously and in the current situation where vapour products are unregulated, we conduct measures such as youth access prevention training to our retail partners and customers to ensure sales are prohibited to minors.

“While the bill will introduce a much-needed law to ensure stern action will be taken against anyone who sells the products to minors, it must be complemented with robust enforcement to prevent minors having access to the products.”

BAT Malaysia also calls on MoH to hold briefing and consultation sessions with industry players to develop regulations once the legislative process is completed in parliament.

“The introduction of the legislation is a much-needed move to develop a detailed regulatory framework, which is not yet in place. Hence, we call on the ministry to hold briefing and consultation sessions with industry players to not only develop these regulations but also to look at science- and evidence-based information that can help them to make an informed decision,” says Salem. “BAT Malaysia believes that each reduced-risk product category, including vapour products and tobacco heating products, should have its own regulatory definition/categorisation and that science should guide the development of evidence-based and risk proportionate regulation for each of the categories.”

Another analyst says while the omission of the GEG from the latest bill is good for the tobacco companies, he does not expect BAT Malaysia to experience a major increase in earnings from the sales of vapour products given their lower margins. BAT Malaysia is the only listed tobacco player on Bursa Malaysia.

“BAT Malaysia’s underlying earnings and revenue have not been that good in recent times because of cannibalisation of vape products on traditional cigarettes. While BAT has got its own Vuse product and the lion’s share of the global market but as a product vape is a lot cheaper, therefore the profit margins that it can make out of it are lower. So you are losing on volume on your traditional products, which have very high margins and are highly priced, and at the same time you can only partially make the earnings back from vape products. So that is the concern at this point in time,” he says.

BAT Malaysia launched Vuse in July. There are two product types, Vuse GO Max and Vuse GO 3000, which are distinguished by their puff capacity of 1,500 and 3,000 respectively. Vuse GO Max and Vuse GO 3000 retail for RM22 and RM27 respectively. One Vuse GO Max is equivalent to five 20-stick cigarette packs in terms of puffs.

Another area of concern is how stringent the compliance requirements of vapour products are, says the analyst. “Right now, the vaping industry is very much driven by the cottage industry. If the compliance requirement is not terribly high, then the competition will still be quite steep in this industry. It is really hard to gauge at this point in time until we know the details. If the trend of cannibalisation continues, then it will dampen BAT Malaysia’s strategy. So while BAT will make inroads in the vaping business, the returns may not be that great so long as there is a lot of competition. But it remains to be seen whether the competitors would be locked out because of regulations,” he adds.

The analyst sees moderate growth potential for BAT Malaysia at this point in time.

“In the short term, things may look better for two reasons. One is that the new regulation is supportive of BAT Malaysia. Second is that BAT Malaysia traditionally loads up on this channel so the sales would look quite good for the fourth quarter. Therefore, you have a good sequential increase. In the short term, BAT Malaysia’s share price should recover a bit more. But the recovery will be held back by all these structural concerns,” he adds. BAT Malaysia’s share price has fallen 17% so far this year to close at RM9.38 on Friday, giving it a market capitalisation of RM2.68 billion.

In an Oct 31 report, UOB Kay Hian Research has a “buy” call on BAT Malaysia, but with a lower target price (TP) of RM11.50 from RM14.40 previously. “We expect BAT Malaysia’s Vuse product to make a sizeable contribution to overall sales over the medium term but for now, we temper our expectations given the challenging and competitive environment. BAT Malaysia offers a decent dividend yield of 7.5% to 9% for 2023 to 2025.”

In a separate report, Hong Leong Investment Bank Research is maintaining a “hold” call on BAT Malaysia, with an unchanged TP of RM9.22. “Though BAT Malaysia launched their vape products ahead of the passage of the tobacco bill, it is essential to closely monitor this event, as it could bring significant regulatory changes to the vaping industry. Currently, there are no restrictions on advertising, promotion, sponsorship, nicotine content, flavours, distribution channels, or retail locations for the vaping industry. Any restrictive measures implemented in these areas may impact BAT’s Vuse products.”

For the cumulative nine months ended Sept 30, 2023, BAT Malaysia’s net profit fell 27% to RM147.38 million from RM200.79 million while revenue was down 8% to RM1.68 billion from RM1.83 billion due to volume weakness experienced by the group.

See also “Experts: Regulate vape industry to curb illicit market” on Page 22 

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's App Store and Android's Google Play.