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Tuesday, 17 January 2017

(The Edge) New PC&APR for consumer sector

Negatively, the new regulation seems to forfeit margin expansion in F&B and household goods purely through price increases
 
Consumer sector
Maintain neutral:
The new Price Control and Anti-Profiteering Regulations (PC&APR) 2016 which supplements the Price Control and Anti-Profiteering Act 2011 applies only to food and beverages (F&B) and household goods. We believe that it could be “positive” for sectors such as apparel, tobacco and retailers as they are no longer subjected to pricing restrictions (on non-F&B and household goods for retailers). As for F&B, based on our understanding that companies are still allowed to increase prices to maintain margins, we believe that it is short-term “neutral”. There is no change to our earnings forecasts and stock calls.

PC&APR 2014 which expired on Dec31, 2016 has now been replaced by PC&APR 2016 (Jan 1, 2017), with no statement of an expiry date. However, PC&APR 2016 covers a narrow scope of products (versus all goods and services previously). In addition to the differences in margin percentage as a mechanism to determine unreasonably high profits, the differences in markup percentage of goods in the new regulation is also another mechanism. Recall that PC&APR 2014 had been in exercise since Jan 2, 2015 to curb profiteering post-goods and services tax implementation.

The profit is determined as unreasonably high if the margin percentage or markup percentage of goods on any date in a particular financial year or calendar year exceeds the margin percentage or markup percentage of goods on the first day of that particular financial year or calendar year.

While the new regulation may seem to restrict affected F&B and household goods companies’ flexibility in adjusting product prices, we understand they are allowed to increase prices to maintain margins (that is to pass on higher operating expenditure or costs of goods). But, due to current weak consumer sentiment, we believe most (including those in non-F&B, non-household goods) may only make minimal price adjustments. Negatively, the new regulation seems to forfeit margin expansion in F&B and household goods purely through price increases, in our view. Our current assumptions for most in our coverage are for net profit margins to stay fl at in 2017. Downside risks include further slowdown in consumption demand, a continuous rise in raw material prices with sustained ringgit weakness and the inability to pass on the higher costs due to the weak sentiment. — Maybank IB Research, Jan 16