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Jul 24,2018 14:22:22

Dividend is the key driver
- If the cigarette stocks continue to be driven by relative dividend yields, GGRM should continue to outperform HMSP.
- 1H18 cigarette industry volume data suggest that HMSP’s volume declined 0.4% vs. GGRM's c.2% yoy volume growth during the period.
- Factoring in a 4% decline in HMSP’s 2018F earnings and GGRM’s higher 2019F capex (airport construction), we estimate GGRM’s yield at c.4% vs. HMSP’s 2.8%.
- Maintain sector Overweight. We now prefer GGRM over HMSP, though we maintain that HMSP is still the better long-term play on cigarette consumption trend.

Dividend yield as key to stock outperformance
In the past three years, GGRM’s share price has outperformed HMSP’s. Our analysis found the relative share price performances of the two stocks correlated strongly with dividend yields. GGRM started to outperform HMSP when its dividend yield rose sharply in 2016, resulting in higher returns vs. HMSP. The normalisation of GGRM’s capex and HMSP’s weak earnings momentum should allow the former to maintain a higher relative dividend yield, in our view.

Smokers continue to prefer high- and mid-tar cigarettes
According to Philip Morris International (PMI), the industry’s volume declined 1.5% yoy in 1H18, reflecting soft consumer purchasing power and higher-than-inflation excise tax hikes on cigarettes. Among the segments, high- and mid-tar cigarettes continued to support the industry’s growth, while hand-rolled and mild segments, and white cigarettes lost popularity.

GGRM consistently seizing market share
The consumers' smoking pattern plays into GGRM’s strength, as evidenced by its ability to expand its volume; much like what happened last year in 2017. Findings from our channel checks suggest that GGRM’s 1H18F volume grew c.2% yoy (vs. industry’s - 1.5%, according to PMI), despite c.8% yoy price increases. We project 1H18 sales growth of c.10% for GGRM vs. c.4% for HMSP. GGRM’s flagship, GG Surya, has been performing well (5M18 volume up 1.5% yoy, according to Nielsen).

HMSP remains a better long-term play
Indonesia smokers would likely shift back to the mild segment when purchasing power normalises; such is the trend globally. Economic uncertainties in the past few years and introduction of the mid-tar segment (effectively discounted cigarettes) led to market share shifting to ‘value’ cigarettes. Producers are incentivised to phase out such products eventually, in our view. HMSP’s firm position in the mild segment suffered, with its flagship A Mild hit (volume down 8% yoy in 1H18). Its 0.3% pt yoy market share gain in 1H18 to 33.2% was driven by low-margin products.

For now, GGRM is a superior stock
Assuming that value cigarettes stay trendy, GGRM should post relatively higher earnings CAGR of c.8% in 2017-20 vs. HMSP’s c.7%. We expect GGRM’s dividend yield in 2019F to remain superior to HMSP’s, unless its payout falls to less than c.43% (past three-year average: 72%). GGRM currently trades at 17x 2018F P/E, a discount of 52% vs. HMSP’s. Meanwhile, the government’s approval of e-cigarettes which have a 57% excise tax and could be sold from Jul 2018, has little impact on GGRM and HMSP, for now.


Dec 13,2016 12:00:07

Indonesia Tobacco: December ex-factory price update: +1-3% m-m
Tobacco: Indonesia
Reiterating our preference for HMSP on its strong brand equity 
According to our analysis, HMSP should face less ASP adjustment than GGRM next year due to cost pressure. ASPs for HMSP’s A Mild (c.60-70% of its total clove machine-rolled cigarette volumes [SKM]) are up by IDR124/stick YTD, vs. cost inflation of c.IDR97/stick. Given that A Mild has high brand equity, HMSP has managed to only lose 3% market share, while having a 13.5% ASP increase YTD despite aggressive pricing by competitors RMBA (Lucky Strike Mild and Dunhill Mild) and GGRM (Surya Pro Mild). Also, RMBA is doing a year-end promotion: IDR400/pack discount for Dunhill Filter and Lucky Strike Mild 16 and IDR300/pack discount for Dunhill Mild 20/16 and Lucky Strike Mild 12. Previously, we had expected GGRM to regain its earnings growth momentum once the company starts to catch up on price adjustments for its Surya Pro Mild in 2017. However, we see competition remaining intense, forcing GGRM to keep Surya Pro Mild ASPs low. Hence, the cross subsidy that GGRM is doing right now should continue, leading to a drag on its earnings.

Sensitivity analysis: GGRM earnings more sensitive to ASP changes
In order to quantify the price adjustment’s impact on the bottom line, we have conducted a sensitivity analysis for every 1% change in ASP. As almost 90% of GGRM volumes are from SKM, the company is more sensitive to ASP changes than HMSP (exhibit 8). We note that Surya 16 contributes c.40-50% to GGRM’s SKM sales volume, International 12 30-35%, and Surya Pro Mild c.10-15%. In other words, each IDR10/stick of additional profit to Surya 16 or International 12 could be used to cross-subsidize Surya Pro Mild by IDR30-40/stick. On the other hand, HMSP’s A Mild contributes c.70% to total SKM volumes, with a 12-stick pack representing about a fifth of total A Mild volume, slightly lower than U Mild’s sales volumes. Thus, every additional IDR10/stick profit at A Mild 16 could be used to cross-subsidize A Mild 12 or U Mild by IDR20-25/stick.

December ASP update: up 1-3% m-m at GGRM, RMBA and Djarum
Unlike last year, GGRM is taking a more cautious pricing approach. Effective 19 December 2016, GGRM plans to raise its Surya 16 ASP by 2.2% (YTD: +6.4%) to IDR1,153/stick, International 12 by 1.4% (YTD: +6.8%) to IDR1,175/stick, Surya Pro Mild by 2.6% (YTD: +10.1%) to IDR750/stick, and GG Merah by 2% (YTD: +7.3%) to IDR854/stick. We calculate that GGRM would need to pass on another IDR83/stick next year to maintain its margins (exhibit 5). Note that Surya Pro Mild was previously selling at par with Lucky Strike Mild 16 (IDR731/stick). Effective 1 December 2016, RMBA increased its Lucky Strike Mild 16 ASP by 3.4% to IDR763/stick, the first time since it was launched in April 2016. However, RMBA is having a year-end promotion until 19 December 2016 to sell at November old prices (IDR300-400/pack discounts). Thus, from 19 December 2016 RMBA will then follow the new price schedule (exhibit 10). HMSP, on the other hand, has not announced an ASP hike in December 2016. However, YTD the company has increased its ASPs for A Mild 16 by 12.4% and Dji Sam Soe 12 by 5.1%, more than enough to offset cost inflation in 2016. In addition, Djarum recently announced ASP increases for a majority of its products, effective 19 December 2016, with the key products being Djarum Super 12 +1.1% (+9.2% ytd), LA Bold +1.3% (+23.7% ytd), and Djarum Coklat +1.5% (+10.3% ytd).
Recommendation: HMSP is our top pick on better margin preservation
As RMBA still offers huge promotions, we prefer HMSP given that it has a higher brand equity in the Mild segment than GGRM.  Thus, we reaffirm our BUY call on HMSP, but slightly lower our 12-month TP to IDR4,600 (from IDR4,700), based on an unchanged 2017F PER of 40x following the 2% reductions to our 2017-18F earnings.  However, we believe GGRM’s valuation gap over HMSP remains compelling at these levels, with the shares trading at a 2017F PER of 17x, a 10% discount to their past-5-year trading PER. Therefore, we reaffirm our BUY call on GGRM and maintain our 12-month target price of IDR81,000 based on a 2017F PER of 21x, a 20% premium to its past-5-year PER, as we see margin improvement ahead from ASP hikes (exhibit 5). The risk to our call on HMSP would be adverse government policy on excise and health awareness. The risk to our call on GGRM would be more pricing competition in the Mild segment, especially from RMBA for its Lucky Strike Mild and Dunhill Mild, making it more difficult for GGRM to increase its Surya Pro Mild’s ASP.


Dec 06,2016 15:11:26

Lower cigarette production limiting customs and duties revenue

Lower cigarette production has limited the customs and duties revenue, which the government expects to reach IDR178tn by year end (10M16: IDR115.6tn). (Kontan)


Nov 28,2016 12:18:24

Heavy rain has ruined tobacco harvest in Central Java. Chairman of the National Commission to Save Clove Cigarettes (KNPK) Klaten branch, Aryanta Sigit estimated that the total losses experienced by tobacco farmers in Klaten amounted to over Rp10bn.

Comment: We have highlight this in our previous tobacco sector Indonesia Tobacco (Keep your tobacco dry!)


Nov 21,2016 11:44:18

Indonesia Tobacco: Currency safe haven
Tobacco: Indonesia

Upgrading: safe haven, competition easing and lower excise hikes
At this stage of the cycle, we upgrade our rating on the Indonesian tobacco sector from Neutral to OVERWEIGHT due to 3 factors: (1) Its safe haven status due to low USD-linked costs (ie, packaging only c.2% of COGS); (2) Easing competition from value-proposition brands on substantial price hikes from Djarum and RMBA (exhibit 20); and (3) lower excise hike in 2017 (exhibit 25). In our view, all of these positive catalysts bode well for industry growth as we head into 2017. Besides the sector’s low USD content in COGS, both HMSP and GGRM have solid balance sheets with no USD-denominated debt. That said, we believe the tobacco sector, whose earnings move by just 0.1% with every 1% change in the IDR on our estimates, offers investors a shield against FX volatility (exhibit 24). OVERWEIGHT.

GGRM over HMSP: Faster earnings growth at attractive valuation gap
Post the 3Q16 results, we adjust our 2016-18F earnings, particularly as we are seeing margin improvement at GGRM on the back of its recent aggressive ASP hikes to catch up with other cigarette players. We see its margins improving over 2017-18F and higher earnings growth compared to HMSP. Moreover, we believe GGRM’s valuation gap over HMSP is too compelling to ignore at these levels, with the shares trading at a 2017F PER of 17x, a 10% discount to the past-5-year trading PER (exhibit 23). Nevertheless, we still like HMSP for its high brand equity and strong corporate governance. Thus, we reaffirm our BUY call on HMSP, but lower our 12-month TP to IDR4,400 (from IDR4,800), now based on a 2017F PER of 40x (from 42x) due to softer earnings-growth momentum ahead. On GGRM, we reaffirm our BUY call and raise our 12-month TP to IDR81,000 (from IDR72,300), now based on 2017F PER of 23x (from 21x), a 20% premium to its past-5-year PER, as we see margin improvement ahead from ASP hikes (exhibit 5). Risks for HMSP: Greater public ownership requirement from the IDX due to limited free float of 7.5%, management change and stiffer competition. Risks for GGRM: Lower product demand due to extreme weather adversely impacting farmer incomes and robust competition.


Nov 16,2016 12:22:43

Cigarette: Inside the Pack – Nov’16

- Our cigarette price survey reveals that many stories are at play in the retail price movements this month, including Gudang Garam’s new ex-factory prices that are yet to be fully reflected in stores. Bentoel is also slating with lower prices through Lucky Strike Mild 12 and the recent retail price drop on Dunhill Mild 16, which might disrupt the market for mild players.

- GGRM’s new ex-factory prices are yet to be fully translated to retail price. GGRM’s ex-factory price increase last week translates to a mere 0.8% MoM retail price increase (versus average ex-factory price increase of c.2%). This is partly caused by some brands’ ex-factory prices that were not raised, and the retail price responses toward raised ex-factory prices may not be complete yet – retailers expect further adjustment in 1-2 weeks. Mirroring the ranks of ex-factory price increases, Pro Mild 16’s retail price leads with +2.6% MoM, followed by Surya 16 (+1.3%), and GG International 12 (+0.5%). For two consecutive months, GGRM ranks last in the monthly retail price movement at +0.5% and +0.8% MoM in Oct’16 and Nov’16, respectively.

- Bentoel is still in with the cheap. The strategy of lower-price products seems to be maintained until the last breath by RMBA. Their retail price increase has been rather muted this year, up by a mere 6.2% YTD (vs. average of 9.3%), where half of the increase comes from last month’s 3.5% jump. Now available at all convenience stores and street vendors we visited, Lucky Strike Mild 12 emerged as the cheapest cigarette, retailing at Rp10,000 – even below HMSP’s U Bold in some areas. Lucky Strike Mild’s widespread distribution comes at the same time as Dunhill Mild 16’s retail price drop of Rp1,000- 3,000/pack to c.Rp15,000 at our survey stores, priced within Sampoerna U Mild’s level. The price drop could be part of their trade promotion strategy, but would still be disruptive to the market, particularly the mild players.

- The fewer is the shield. HMSP’s overall retail price grew by 1.6% MoM in Nov’16. We notice that A Mild 12’s retail price increase is accelerating to 5% MoM this month, while it also has the highest year-to-date increase among all brands at 24.2% YTD (vs. average of 9.3% YTD). HMSP previously mentioned that double-digit EBIT growth target this year is maintained even if it comes at the expense of premium brands’ market shares through further price increase. Meanwhile, A Mild 16’s price was flat this month. Trailing behind A Mild 12 is Magnum Blue’s retail price increase (4.7% MoM in Nov’16; 13% YTD).

- A peek at WIIM’s 2017. We notice that WIIM’s retail price starts to grow at a slower pace behind HMSP in Nov’16 (0.9% vs. 1.6%, respectively), potentially signaling the strategy for next year as to maintain pricing points, given ample room for 1 bn more cigarettes.
- Banderol price increases are seen on three brands: Magnum Filter 12 (+Rp800 to Ro13,450); Sampoerna Kretek (+Rp275 to Rp10,350); and Djarum Coklat 12 (+Rp100 to Rp10,350).


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.


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Bentoel Internasional Investama
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