Cigarette Manufacturers Indonesia Experience Tough Times

Of the four big (publicly listed) cigarette manufacturers in Indonesia only Bentoel Internasional Investama is yet to release its H1-2017 corporate earnings report. Of the other three only Gudang Garam managed to post growing net profit and sales. The two others - HM Sampoerna and Wismilak Inti Makmur - saw their sales and net profit decline.

Local brokerage firm Samuel Sekuritas noted that despite the slight decline in profit of HM Sampoerna, which is Indonesia's largest cigarette manufacturer (and controlled by tobacco giant Philip Morris), it managed to safeguard a stable margin. Still, on Tuesday (01/08) shares of HM Sampoerna plunged 3.38 percent to IDR 3,430 a piece, while so far this year its shares have contracted by 10.44 percent.

Also for the other tobacco companies it was a bad day at the office today. Shares of Gudang Garam even fell 5.03 percent to IDR 72,275 a piece on Tuesday, although its shares are currently still 13.11 percent above the position at the year-start. Meanwhile, shares of Wismilak Inti Makmur tumbled 3.08 percent to IDR 378 a piece today. Since the start of the year the company's shares have fallen 14.09 percent.

Shares of Bentoel Internasional Investama, which is still to release its H1-2017 earnings, did not move on Tuesday. However, so far this year its shares have fallen 11.16 percent to IDR 430 a piece.

The performance of Gudang Garam is markedly different from the rest; it is the only listed cigarette manufacturer in Indonesia that saw its shares rise so far this year and it is the only one that saw its corporate earnings improve in H1-2017 (albeit we are still waiting for the release of Bentoel Internasional Investama). This positive performance is attributed to better sales volumes (compared to its competitors) as it is yet to raise prices.

Earnings Indonesia's Listed Tobacco Companies in H1-2017:

	Sales H1-2017	Sales H1-2016	Y/Y Growth
Gudang Garam	40,245	36,962	+8.88%
HM Sampoerna	46,589	47,336	-1.58%
Wismilak Inti M.	761	903	-15.73%

^{in billion IDR}

	Profit H1-2017	Profit H1-2016	Y/Y Growth
Gudang Garam	3,124	2,869	+8.89%
HM Sampoerna	6,050	6,148	-1.59%
Wismilak Inti M.	11	58	-81.86%

^{in billion IDR}

Through Finance Minister Regulation No. 174/PMK 03/2016, effective per 1 January 2017, the Indonesian government pushed the value-added tax on cigarettes up to 9.1 percent. This higher VAT followed an average 10.54 percent cigarette excise tax increase in the same month.

Besides government tax policies, there has also emerged rising competition in Indonesia's tobacco industry due to the arrival of newcomer Camel Mild from Japan, while Bentoel Internasional Investama recently released a new product - Lucky Strike Gold - that has a more affordable price.

Still, we expect that the two leading companies - HM Sampoerna and Gudang Garam - have enough strength, brand awareness and customer loyalty to weather the storm although on the long-term the prospects of the whole cigarette industry is less rosy as the government seems eager to curb smoking. But on the medium-term there is room for growth of both companies shares.

Considering both HM Sampoerna and Gudang Garam are among the top ten biggest companies in Indonesia (in terms of market share on the Indonesia Stock Exchange), it is clear that smoking is something big in Indonesia. It is estimated that about 67 percent of males above 15 years of age are smokers.

Stock Performance Comparison Four Cigarette Companies:*

^{GGRM = Gudang Garam
HMSP = HM Sampoerna
WIIM = Wismilak Inti Makmur
RMBA = Bentoel Internasional Investama}

^{* normalized stocks, 1 January 2017 = 100}

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