Japan Tobacco’s expansion plans face hurdles in Philippines — BMI Research

JAPAN Tobacco’s (JT) expansion in the Philippines is facing headwinds, as a nationwide ban on public smoking and higher taxes on tobacco products are expected to dampen demand for cigarettes, according to BMI Research.

In an industry trend analysis, BMI said the Philippines and Indonesia are “strong tobacco sales growth markets” in Southeast Asia. It noted that tobacco demand in the Philippines is seen to grow 6% year on year until 2021, slower than Indonesia’s 8.5% growth during the same period.

“We believe Indonesia will be the stronger performer of the two, as there are some risks associated with JT’s entry into the Philippines. First, changes in legislation will result in an increase in taxes for tobacco products through the Sin Tax Reform Law that will impose a unitary tax of P30 on all cigarettes from January 2017,” BMI said.

Republic Act No. 10351, or Sin Tax Reform Law, restructures the previous two-tiered tax rate for cigarettes. The unitary rate for all types of cigarettes is now P30 per pack.

Previously, cigarettes were taxed and stamped according to their net retail price. Cigarettes priced below P11.50 were taxed at P25 per pack; while those priced higher were taxed at P29.

“This will reduce the consumption of cigarettes as a price rise could deter smokers,” the Fitch unit said.

Demand for cigarettes in the Philippines is also expected to take a hit after President Rodrigo R. Duterte signed Executive Order no. 26 in May, imposing a nationwide ban on smoking in public places.

“This would further depress the growth in tobacco spending present in the Philippines,” the Fitch unit added.

JT has been making an aggressive push into emerging Asian markets, after seeing a drop in domestic sales in Japan. It recently acquired local cigarette firms in the Philippines and Indonesia.

The international cigarette maker entered a tripartite deal with the Philippine national government and local tobacco firm Mighty Corp., to buy out the latter and pay its P25-billion tax liabilities — which turned to be the largest tax settlement case in Philippine history.

On Sept. 7, JT announced that it has completed the acquisition of Mighty Corp.’s assets valued at P46.8 billion after it was approved by the country’s competition body.

JT also bought “kretek” cigarette maker PT. Karyadibya Mahardhika (KDM) and PT. Surya Mustika Nusantara ( SMN) in Indonesia for $677 million.

BMI expects JT, whose brands include Winston and Camel, to continue its expansion in the Southeast Asia.

“As JT lowered its domestic cigarette sales forecast for its 2017 financial year in August 2017, as the number of smokers fall, BMI predicts that the company will continue its expansion deeper into Southeast Asia. Showing one of the highest growth rates in Asia are the countries of Cambodia, Laos and Vietnam, which are forecast to offer growth rates in tobacco spending of 10.2%, 10% and 9.6% respectively over the medium term (2017-2021). Further expansion into these high growth markets will help offset declining volumes in its domestic market,” the report read. —