Oct 25, 2016 23:45:18

HM Sampoerna ($HMSP): 3Q16 results: Mostly on track
Revenue: in line with aggressive ASP hikes 
HMSP recorded 3Q16 revenue of IDR22,939bn, down 9.7% q-q but up 5.3% y-y (ASP rose by +3% q-q and +10.9% y-y). This translated into 9M16 top-line growth of 7.3% y-y, with an 11.3% y-y ASP hike. We observed declining volumes across three product segments: 

9M16 market share loss of 70bps 
Despite ASP growth of 11.3% y-y in 9M16, HMSP’s market share declined by 70bps to 34.5% against its other value-proposition brands (i.e., LA Bold by Djarum and Dunhill Filter by Bentoel [$RMBA]), mainly dragged down by some of its major product lines such as A Mild (-60bps y-y), Dji Sam Soe (-50bps y-y), and U Mild (-60bps y-y). On a more positive note, in the midst of an industry stick sales decline of 1.2% y-y in 9M16, HMSP saw a significantly higher market share for its A Mild 12 product (current: 2.4% market share) due to geographical marketing expansion. Although the costs of production for the A Mild 12 and the A Mild 16 are similar, the A Mild 12 is selling at a 13% discount to the A Mild 16. Thus, there was a slight correction in the A Mild 16 market share to 10.8%. HMSP is facing production capacity constraints for its A Mild 12 product. Following A Mild 12’s success, the U Bold cigarette line has seen a doubling of its market share q-q to 1.8%, despite having increased its ASP by more than 12% in the past 3 months. Therefore, we are seeing a shift in consumer preference toward cheaper products, indicating that the average consumer in Indonesia is price-sensitive. 

Aggressive promotions + high brand equity = double-digit EBIT growth 
We estimate that HMSP should only have needed to increase its ASP by about 8% to adjust for the 2016 excise tariff hike. However, the company has increased its ASP by 11.3%, paving the way for guidance of double-digit operating performance growth. This has resulted in a 40bps increase in GPM y-y. HMSP booked 3Q16 net profit of IDR2,933bn, down 3.2% q-q, but up 13.5% y-y. The reason for the robust y-y growth was the much higher interest income from its rights issue proceeds. As a result, 9M16 profit amounted to IDR9,081bn, up 19.5% y-y, in line with our estimate and marginally higher than that of consensus on higher interest income.