Malaysia May Raise Tobacco Taxes (fwd)

[Robert Weissman <rob@essential.org>]

The Star (Malaysia) 
                                               Monday, August 17, 1998
                   Focus

                   Tobacco companies worry about
                   tax hike in 1999 budget 

                   THE most pressing issue facing the Malaysian tobacco
industry currently is
                   the possibility of a tax increase in the 1999 federal
budget. 

                   An analyst told Star Business that looking at the present
situation, there is
                   no doubt that the government would have to source for
income from the
                   tobacco and brewery industries to compensate the lower
taxes from other
                   sectors. 

                   However, some parties feel that the tax hike would only
result in the
                   increasing sale of contraband cigarettes in the local
market. 

                   Even if that were true, the analyst concurred that the
government would not
                   back out on increasing taxes based solely on that reason. 

                   He said that there were many other ways for the
government to control the
                   influx of contraband cigarettes. 


                                 There are an estimated 24,000
                                 tobacco farming families in the
                               country with 60% of them based in
                              Kelantan. The industry also employs
                                     some 21,000 people. 

                   In addition, it had also been a while since these taxes
were increased. 

                   Although in a normal situation, demand should go down
when price goes
                   up, this is not the case in the tobacco industry which
has enjoyed
                   continuous growth over the last few years despite tax
increases. 

                   On the other hand, the analyst cautioned that this year
the theory might
                   hold true even for the tobacco industry. 

                   "The possible high inflation will squeeze every inch of
the population's
                   disposable income to an extent where people will have to
reduce their
                   expenses especially the unnecessary ones to the bare
minimum," he said. 

                   The analyst noted that the latest measures adopted by the
government to
                   reduce interest rates would be beneficial in the long run
but in the short
                   term, the currency may experience a further devaluation. 

                   This is not good news for cigarette companies which are
using between
                   30% and 50% of imported tobacco for their production as
the weakening
                   of ringgit would trim their profit margins. 

                   The analyst said that coupled with the anticipated higher
government taxes,
                   tobacco companies would have to brace for a possible
negative growth
                   should the economy worsens. 

                   Tobacco counters were recently brought down amid fears
that high
                   inflationary pressures on the economy would hurt the
potential sales
                   growth. 

                   The surprise came when Rothmans of Pall Mall (M) Bhd,
which had been
                   outperforming the KLSE Composite Index (CI) for months,
being sold
                   down from its RM37 mark to the recent RM28 level. 

                   Its closest rival RJ Reynolds Bhd was also not spared.
The counter, which
                   was traded at RM7 before investors lost the grip of the
market, went to a
                   low of RM4.80 before climbing back to settle at RM5.75
(as of June 30). 

                   On the other hand, the analyst said, the prospects in the
tobacco industry
                   remains positive as the sales are not expected to be
significantly affected
                   when inflation starts its bite. 

                   "The years of smoking habit cannot be totally erased in a
short period.
                   Although it is not totally impossible, a large number of
smokers who want
                   to quit would prefer to do it in a gradual manner, i.e.
lowering the number
                   of sticks smoked in a day rather than putting an end in
one day's time," he
                   said. 

                   In addition, the cash-rich nature of these companies
makes it one of the
                   safest investment in the market. 

                   Companies like Rothmans, R.J. Reynolds and Malaysian
Tobacco Co Bhd
                   are already geared up to venture into export markets. 

                   As such, the analyst recommended investors to hold on to
R.J. Reynolds
                   and Rothmans shares which are trading "close to their
fair values." 


                   Copyright © 1998 Star Publications (M) Bhd (No: 10894-D).