Another move towards diversification

Philip Morris' e-vapor line-up, VEEV, has recently made its Indonesia debut on 9th July, 2024. 2 variants will be available on Indonesia market:

VEEV One, close-ended vape-pod system consisting of a rechargeable device and a replaceable refill pod
VEEV Now, close-ended disposable e-vapor device consisting of an e-vapor device integrated with the liquid storage unit.

Following IQOS' playbook, VEEV will be imported from PMI on initial market stages, with distribution via existing IQOS stores and Indomaret (as opposed to RELX, which is exclusively distributed through Alfamart).
While e-vapor has been part of PMI's product portfolio since 2016, it was not until 1Q23 that PMI doubled down on its e-vapor business by streamlining all of its e-vapor products under one brand, VEEV. The Co indicated that commercialization of e-vapor will help to push PMI's next-gen products, given challenges faced by heated tobacco (c.32% of PMI's adj. net revenue) and oral nicotine (c.6% of PMI's adj. net revenue) in select markets. Considering the fact that the market is already familiar with e-vapor, we think VEEV may see faster adoption rate in Indonesia compared to IQOS, which required the Indonesian market to get familiar with the newer tech.

Scale remains as key challenge, but overall positive for HMSP

We believe VEEV should yield better margins compared to conventional cigs and IQOS, simply due to excise tax arbitrage. Excise tax component of close-ended e-vapors stood at 34% to minimum selling price (HJE), still lower compared to conventional cigs (c. 45%) and heated tobacco (c. 52%). However, the key question lies in whether VEEV can achieve the level of scale needed for a material margin accretion to show in HMSP numbers. We highlight 2 key risks that may hinder penetration of VEEV: 1) Fragmented e-vapor market with significant presence of open-ended e-vapor users, 2) Regulators have started throwing caution to the wind for e-vapors
Having said that, we think VEEV's launch is an overall positive for HMSP as it adds to the Co's alternative cigs portfolio, which could provide for a re-rating catalyst for the stock within a longer timeframe (See: Cigarettes - No Breathing Room Yet) . We maintain BUY call on HMSP with TP of IDR950. Downside risks to our call: 1) Further unfavorable regulatory developments, 2) Erosion of consumer buying power.

HMSP - VEEV, New Kid on The Block

HMSP - VEEV, New Kid on The Block

Research 1

15 July 2024 - 07.00am

HMSP - VEEV, New Kid on The Block

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