Hello! Happy New Year 2013 as well! I haven’t been updating my blog so this is my first post for the year. Hope it suffices. A warning though, this is lengthy because I need to discuss and give an overview first of each company affected (3 companies), explain the sin tax law and then make my assumptions and analysis. Since we will be talking a lot about sin products, I also inserted a lot of images that may leave the reader a bit distracted. Thank you 🙂
– Faceless Trader
Unless one has been living in a cave or has not read news papers, President Aquino has signed the historic “Sin Tax Bill” into law. Last December 20, 2012, the Sin Tax law will raise additional government revenues by increasing taxes in “sin products” such as alcohol and cigarettes. The revenue collected will go to the government’s health care program for the construction of major hospitals nationwide. Contrary to the workers unions who were against the sin tax because of fear of decreasing their wages, tobacco industry workers will actually have increased benefits as the support of the government grows stronger for their wages et al.
Most of the people who opposed the sin tax bill noted that some cigarette-factory workers might lose their jobs, tobacco farmers might earn less than what they are presently earning and street vendors will lose a chance to earn. “The passing of the bill can eventually lead to the death of the tobacco industry,” he said. The truth is that the tobacco industry will not die.
For stock market participants and sin product consumers (wink wink :P), there are three companies in the Philippines that are affected by the recently passed Sin Tax Law. Before I address all the definitions in the Sin Tax Law, we need to first analyze the financial performance of the three companies over the years and understand each of their competencies.
1.) Lucio Tan Group of Companies (LTG) via Fortune Tobacco and Tanduay Distillery –
The classic sin stock – Alak at Sigarilyo – No wonder Mr Lucio Tan is one of the richest taipans in the country 🙂 Boardwalk empire it is!
2.) Alliance Global (AGI) via subsidiary Emperador Distillery
3.) San Miguel Corporation (SMC) via subsidiary San Miguel Brewery (SMB) and Ginebra San Miguel (GSMI)
Notice that Ginebra San Miguel’s selling and marketing expenses compared to the competition (Emperador Distillery and Tanduay Rhum) is larger than the rest. Something is wrong here. GSMI is spending a lot to fight for its share of the hard drinks market in the Philippines and it hasn’t been working. Seems Filipinos are more rum drinkers than gin drinkers. Take a look at my commentary below on each of the relevant details in GSMI.
Question: What exactly happens with the sin tax law?
Answer: It takes effect on Jan 1, 2013. Cigarettes and Alcohol products will be taxed higher. I’ll discuss each of the parts in detail below.
Cigarettes will be taxed based on the brand’s retail price. If you’re a smoker, you will have nostalgic memories of an era when cigarettes were cheap as it will just keep escalating year after year.
For Specific Breakdown , see the following table below:
To understand what this chart means, Marlboro Packs which will fall under the low-priced and medium priced packs which used to cost P12/pack prior to the sin tax era which paid P2.72 only to the government will now pay P12.00 or an extra 60 centavos per stick to each smoker. This will keep on escalating to P15, P18, until P26 at 2017. Assuming Lucio Tan Group of companies passes this 100% on to the consumers, expect your P12 cigarette packs which probably retail to consumers at about P1 a stick to jump more than 100%. In fact those that used to retail at P20 a pack have now risen from P28-P50/pack depending where you’re buying. A lot of news reports have been seen where shelves of stock from Luzon to Mindanao that have been hoarded by Sin Tax Arbitrage traders.
Since Filipinos are used to the tingi system, I used the survey made by Interaksyon 5 on peddlers of cigarettes in Makati to give a current survey of prices of cigarettes for 2013 post sin taxes.
Post Sin Tax Era – 2013
Mandated Increase in Taxes in % Form for Tobacco Industries
How about Alcohol?
Alcohol products will be taxed based on the raw materials used to make the product, the net retail price per bottle of the product, and proof (volume of alcohol in alcohol-water mixture) of the beverage.
1.) Note that in the distilled spirits category which basically consists of rum, wine, gin and brandy – we are clearly talking mostly about Tanduay since 82% of revenues is captured in the rum category. Also, Emperador Distillery is primarily Brandy with the flagship product Emperador Light growing revenues by 48% yoy for 9M12. Ginebra San Miguel will fall in this category as well due to being the leader in terms of gin sales, however as we can see, gin volume has clearly been droppping. Philippines is not so much a wine drinker so in our simulation, we’ll just try to assess the big products first.
2.) Fermented Liquors will affect San Miguel Brewery (SMB) as 79% of sales is Red Horse and Pale Pilsen.
To be Updated –
Whew! this is such a long study.
– Faceless Trader