KUCHING: Philip Morris International’s (PMI) launching of its flagship heat-not-burn (HNB) device, the iQoS, in Malaysia may deflate the margins of British American Tobacco Bhd (BAT).
In a company update report, the research arm of Affin Hwang Investment Bank Bhd (Affin Hwang Capital) said that it believed PMI could potentially be a significant competition to BAT’s current market share in the tobacco industry.
“Based on the robust demand seen in Japan its (PMI’s iQoS) maiden market and Korea, we believe that PMI’s iQos could similarly receive a strong reception ion Malaysia, based on its affordability relative to premium cigarettes and alternatives such as vaping and e-cigarettes, as well as purportedly reduced health risks arising from lower harmful content emitted from heated tobacco.
“Consequently, we expect the introduction of heated tobacco products to cannibalise the traditional cigarette market
“In under three years, PMI has managed to capture 16 per cent of the tobacco market in Japan with its HNB product and seven per cent in Korea in over one year,” it said.
While BAT has yet to announce any plans for the introduction of its own heat-not-burn brand – Glo, the research arm opined that the group would not fall behind as PMI’s iQoS typically takes at least two quarters to gain traction.
“BAT still has time to make up for PMI’s first-mover advantage, whilst possessing a wider portfolio of alternative products.
“On the other hand, the launch of HNB products should initially deflate BAT’s margins,” said the research arm.
Meanwhile, it noted that threat of the illicit cigarette market has lessened on BAT as authorities have continued to take actions to curtail the illicit cigarette market.
“This supports our thesis for a broad earnings recovery for the legal tobacco players, particularly for BAT which commands the leading market share,” shared the research arm.
All in, Affin Hwang Capital maintained its ‘buy’ call on the stock as it believed BAT is well-equipped to respond to the iQos competition with its brand of heated tobacco products.
“We continue to expect a meaningful earnings recovery to materialise, underpinned by the envisaged decline in the illicit trade,” said the research arm.