Cigarette. Benefiting from a more level playing field

Transcription

1 Equity Research Cigarette Thursday,21 December 217 NEUTRAL Downgrade Jakcons relative to JCI Index 2,8 2,6 2,4 2,2 12/21/216 Jakcons Index(LHS) 1/17/217 2/14/217 3/14/217 4/11/217 HMSP relative to JCI Index GGRM relative to JCI Index Natalia Sutanto 5/9/217 6/6/217 7/4/217 (62-21) ext.358 Relative to JCI Index (RHS) 8/1/217 8/29/217 9/26/217 1/24/217 11/21/217 12/19/217 % Cigarette Benefiting from a more level playing field We see room for both HMSP and GGRM to grow since the 218 excise tax regulation creates a more level playing field in the cigarette industry and because populist policies ahead of the elections in 219 should bolster purchasing power at the grassroots level. Improved buying power and less intense competition should allow cigarette producers to increase their selling prices, in our view. However, with limited upside to our TPs, we downgrade our stance to neutral on the sector. 218: a more level playing field. There are two key points in the 218 excise tax regulation that will create a more level playing field in the cigarette industry. This will reduce the competition from cheaper cigarettes and benefit the major cigarette players including HMSP and GGRM. The first point relates to tier simplification which will push more producers into the higher tax bracket. The second point concerns pricing. The government lowered minimum selling prices for the end-retailers to 85% (from 9% previously), accelerating the hike of banderol prices and pushing for higher tax revenues. As a result, it is more difficult to offer cheap cigarettes to consumers. It is also worth noting that the government will allow a 2-month payment delay for the purchase of excise in the period from Dec 218. Positive outlook for 218. Following the better 3Q17 sales volume with ASP hikes and a supportive outlook from 218 excise, we are optimistic on the prospects for both HMSP and GGRM next year. For HMSP, the company should also benefit from additional regulations that will combine the total production of SKM and SPM for the volume threshold of excise tax, starting in 219. Therefore, we expect both companies to book positive volume growth ranging from 1-2% in 218. Combined with higher selling prices, we estimate the sector to maintain an operating margin of 15.8%. Earnings growth should reach 1.1%. Downgrade to Neutral. Based on our monthly survey of cigarette retail selling prices, we learnt that most products reported flat growth on a monthly basis. Nonetheless, the Ytd selling price adjustments to cheaper cigarettes (offered at around Rp1,/stick) were greater, as producers attempted to gradually pass on higher excise tax whilst seeking to comply with the 218 regulation on minimum retail selling prices. With a closer gap between the retail selling prices of competing products, we believe big cigarette players will benefit. Our preference is still for HMSP given its strong product portfolio, which allows the company to tap the low to high segments. For GGRM, the uncertainty on the airport project poses downside risk in spite of its success in maintaining positive sales volume growth. Nonetheless, we believe all the good news already priced in, resulting in limited upside to our TPs. As such, we downgrade our recommendation on HMSP and GGRM to HOLD. We also downgrade our sector call to neutral from overweight. Target Price Market Cap. P/E (x) P/BV (x) ROE (%) Company Ticker Rec (Rp) (RpBn) 217F 218F 217F 218F 218F HM SAMPOERNA HMSP IJ HOLD 4,4 517, GUDANG GARAM GGRM IJ HOLD 83,8 152, See important disclosure at the back of this report

2 Exhibit 1. Excise tax structure for SKM, Exhibit 2. Excise tax structure for SKT, Source: Ministry of Finance Source: Ministry of Finance Exhibit 3. HMSP volume (bn sticks) and market share Exhibit 4. GGRM volume (bn sticks) and market share % 34.3% 33.4% 32.9% M17 Volume - LHS Market share - RHS 4.% 35.% 3.% 25.% 2.% % 22.% 21.5% 21.5% 21% 2.8% 21.% 2.5% % H17 Voume (Bn sticks) - LHS Market share - RHS Source: Company, Danareksa Sekuritas estimates Source: Company, Danareksa Sekuritas estimates Exhibit 5. HMSP retail selling prices growth Ytd Sept 217 Exhibit 6. GGRM ex-factory selling prices growth - Ytd Dji Sam Soe 12s A Mild 16s Sampoerna Kretek 12s 4.1% 5.8% 5.9% GG Surya SKM FF 16s GG International SKM 12s 3.3% 5.7% Dji Sam Soe Magnum 1.% GG Mild LTLN 16s 6.% U Mild 16s Marlboro red 2s U Bold 12s 11.8% 13.% 17.4% GG Merah SKT 12s GG Surya Promild SKM FF 16s 6.3% 11.7%.% 5.% 1.% 15.% 2.%.% 5.% 1.% 15.% Source: Company Source: GGRM *13 Dec 217 2

3 Our monthly survey Based on our monthly survey of cigarette retail selling prices, we learnt that most products reported flat growth on a monthly basis. Nonetheless, the selling price adjustments to cheaper cigarettes (offered at around Rp1,/stick) were greater, as producers attempted to gradually pass on higher excise tax whilst seeking to comply with the 218 regulation on minimum retail selling prices. With a closer gap between the retail selling prices of competing products, we believe big cigarette players will benefit. HMSP: higher growth in Marlboro selling prices. Of four major HMSP products (exhibit 7), only Marlboro red (2s) showed higher retail selling prices (up by 2.4% mom, Ytd 11.4%), paving the way for the company to gradually pass on the higher expected excise tax increase in 218 (+12.6% yoy). The remaining products saw price increases in the range of 2-1% ytd. We also note that Dji Sam Soe Magnum Mild 16s the new product launched in May 217 saw its retail price increased by 2.9% mom (this was done to meet the requirement of 85% minimum retail selling price to banderol, we believe). Exhibit 7. Retail selling prices HMSP products Dec-17 mom Ytd HMSP A Mild 16s 21,.% 2.4% Dji Sam Soe 12s 16,5.% 1.% Marlboro red 2s 25,5 2.4% 11.4% U Mild 16s 17,3.% 8.8% Other products Dji Sam Soe Magnum Filter 12s 16,5.% 3.8% Sampoerna Kretek 12s 12,.% -4.8% A Mild merah 12 15,.% 11.9% A Mild menthol 16 21,.% 2.9% Marlboro black menthol 2 25,2.% 9.6% Marlboro ice blast 2 26,4.% 1.5% Marlboro menthol lights 2 25,2.% 9.6% Dji Sam Soe Magnum Mild 16 14,3 2.9% na Dji Sam Soe Super Premium 12 19,2 1.1% na Marlboro lights 2 25,5 1.2% 13.8% 3

4 GGRM: Flat mom selling prices. We saw no monthly retail selling price (RSP) increases for the five major products under GGRM, as per our last conversation with the company. However, the highest ytd increase was for GG Promild 16s (+14% ytd). Bear in mind that GG Promild 16 is offered at around Rp1,/stick. Exhibit 8. Retail selling prices GGRM products GGRM Dec-17 mom Ytd GG Merah 12 12,8.% 7.6% GG International SKM 12 sticks 17,.% 3.% GG Surya SKM FF 16 sticks 21,3.% 1.9% GG Surya Promild SKM FF 16 sticks 15,5.% 14.% GG Mild LTLN 16 sticks 15,9.% 4.6% GG Mild Shiver 16,2.% na Gudang garam surya 12 15,8.% na GG Surya Exclusive 16 24,.% na GG Signature Mild Blue 16 15,.% na Competitor products: We observe that the SKMFF products under Djarum only booked ytd price increases ranging from 2-3% ytd - or similar to the price increases for GGRM products - on continued weak demand this year. For Djarum s new product, Djarum Super Mild 2 MLD, prices have been increased by 8.6% ytd to Rp1,/stick. For Bentoel, with soft demand leading to declining market share in SPM (9M17: 5.3% vs FY16: 6.%), the company lowered the price of Lucky strike red (2s) by 13.4% ytd, despite the expectation of higher excise tax. Other products under Bentoel especially those priced below Rp1,/stick, saw significant price increases ranging from 1-18% ytd. Exhibit 9. Retail selling prices competitor products Dec-17 Ytd Djarum Djarum black 16 (filter) 19,3 2.7% Djarum black mild 16 17,3 2.4% Djarum LA Light 16 19,3 2.1% Djarum LA menthol light 16 19,5 3.2% Djarum super 12 17,3 3.6% Djarum super 16 21, 1.% Djarum super mild 2 MLD 2,3 8.6% Djarum LA Ice 16 19,3 2.1% Bentoel Lucky strike red 2 17,4-13.4% Dunhill fine cut mild 2 21, 2.4% Dunhill fine cut mild 16 16,5 1.% Dunhill fine cut filter 2 26, 18.7% Dunhill find cut international menthol 2 26, 17.1% Esse Mild super slim 2 18,9 8.% Esse mild menthol super slim 2 18,9 8.% 4

5 Exhibit 1. Excise tax Type Criteria Minimum retail price (Rp) Excise (Rp) yoy growth Production limit (per stick) (per stick) SKM I Minimum Rp1.12, % Above 3bn sticks II Above Rp895, 385 Maximum 3bn sticks From Rp715 to Rp SPM I Minimum Rp1,13, % Above 3bn sticks II Above Rp935, 37 Maximum 3bn sticks From Rp64 to Rp SKT or SPT I Above Rp1.26, % Above 2bn sticks From Rp89 to Rp1,26 29 II Minimum Rp47 18 Above 5mn to max 2bn sticks III Minimum Rp4, 1 Max 5mn sticks SKTF or SPTF Minimum Rp1,12 59 No production limit Source: Minister of Finance 5