Malt Liquor Sector - Cheap foreign beer flooding domestic market Underweight

- A local daily today headlined the proliferation of cheap foreign beer with high alcohol content in the domestic malt liquor market (MLM). These include, but are not limited to, illicits and contrabands of which no duty or taxes are paid.
- Quoting a source, the article highlighted that the supply of cheap imported beer has increased 5-fold in the past 5-7 years. These beers can now be purchased at 60% of retail outlets which include coffee shops, convenience stores, medical halls, major supermarkets and liquor distributors. In the past, they were only stocked at smaller retailers like suburban sundry shops.
- A survey by the daily showed that in the Klang Valley alone, more than 20 brands were easily available. These include names like Jopen, 3 Horses, San Miguel, Oettinger, Viper and Volcano and are imported from neighbouring countries (Thailand, Philippines, China) as well as Europe (Netherlands, Belgium, Denmark).

  The beers, with alcohol levels in the range of 5% to 16.8%, are purportedly sold at almost half the price of locally-produced beer, making them popular among the lower income group. Compared to premium imported beer brands that are priced from RM9/bottle, these cheap foreign beers can be obtained for as low as RM4.29/330ml can or RM5.00-RM7.00/550ml can.
- This seems illogical as these foreign beers should be more expensive given that they would have to pay an additional RM5.00/litre for import duty and on top of higher excise duties (RM7.40/litre for beers currently) in view of the higher alcohol content. Other tax charges include a 5% sales tax and 15% ad valorem tax.
- The rise in consumption of beers with higher alcoholic is a worrying trend as this may spur the uptake of compounded-hard-liquor (CHL). As it is, many drinkers are already switching because of “an inequitable tax structure” that results in unbalanced pricing for alcoholic drinks. For example, whisky has 8x the alcohol content compared to beers but its excise duty is only 4x of the latter’s. Unlike the tobacco industry, the Customs Department do not regulate beer pricing and as such no minimum retail prices are determined.
- We gather that uncollected duty from cheap imported beer may amount to ~RM250mil while the total tax evasion from all alcoholic beverages could be as high as RM1bil. The sector contributes close to 12% of the government’s total excise duties (2012 revised estimate of RM12.3bil and 2013 budget estimate of RM12.8bil).

 All in all, we reaffirm our UNDERWEIGHT stance on the MLM sector, with SELLs on both Guinness Anchor Bhd (FV: RM14.70/share) and Carlsberg Brewery (M) Bhd (FV: RM12.50/share). Soft MLM volume growth (FY14F: 1%-1.5%), weakening consumer sentiment, impending GST implementation and more importantly, the possibility of an excise duty hike in the upcoming Budget 2014, continue to weigh on the industry.