Declining Sales of Combustible Products: BAT Malaysia May Shift Focus to NTPs including Vuse

According to a report from Malaysian business media outlet Business Times, British American Tobacco (BAT) still faces challenges in terms of its profit prospects. The main reason is the lack of strong revenue streams in its new areas of business, coupled with a declining trend in the combustible cigarette market.

A study by Hong Leong Investment Bank (HLIB) shows that in the fiscal year 2023 (FY23), sales volume for BAT experienced a significant decrease, dropping by 12.9% compared to a smaller decline of 1 percentage point for the industry benchmark.

The significant decline can be attributed to two main factors: ongoing downgrading activities affecting BAT's premium and AP sales, which contribute to approximately 70% of the group's combustible cigarette sales, and a decrease in sales following a price increase in September 2023. In particular, price hikes for BAT's Dunhill and Peter Stuyvesant brands have created a price gap with competitors like Philip Morris International (PMI) and Japan Tobacco International (JTI), putting pressure on the group's fourth-quarter cigarette sales. Unless JTI and PMI also raise prices, it is expected that this will continue to impact BAT's sales performance.

Faced with a declining trend in the flammable cigarette market, BAT has launched a new brand called Luckies to diversify its brand offerings and protect its market share. Leveraging BAT's extensive sales network and the competitive price point of Luckies, this new brand has garnered positive attention since its launch.

According to a survey by BAT, consumer awareness increased from 16% in the first week after launch to 44% in the fifth week. According to tracking, Luckies' market share has increased from 0.1% in August 2023 to 1.4% in December 2023.

Meanwhile, currently, sales generated by the e-cigarette brand Vuse account for less than two percent of BAT's total sales, the group's goal is to have the new category (Vuse and THP) reach 30% of total sales in the next three to five years. "The main focus will be on expanding the Vuse product line, which involves increasing product supply and expanding the sales network.

British American Tobacco (BAT) plans to increase sales coverage by stocking Vuse products in more retail and e-cigarette stores. Currently, Vuse products are only available in 6,600 retail stores and 1,100 e-cigarette stores, significantly less than the 45,000 sales points for BAT combustible cigarettes, indicating room for growth.

However, in the early stages, the contribution of the new tobacco sector will still be a drop in the bucket.

Currently, HLIB has a "hold" rating on the stock, with a target price unchanged at 9.22 ringgit.