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Tobacco
It’s all about the price tag
Hefty cigarette consumption in Indonesia

Overweight
In Indonesia, tobacco industry is considered to be one of the largest industries,
given the high domestic cigarette consumption. According to data from the Ministry
Initiation Report
of Agriculture, buying cigarettes makes up the third largest expenditure of
November 20, 2017 Indonesians in their daily expenses, which indicates a buoyant demand for
cigarettes. The habit of smoking has eventually shaped the culture and lifestyle of
Mirae Asset Daewoo Co., Ltd. Indonesian consumers.
Consumer Indonesians’ love for kretek offers a natural barrier
Christine Natasya
In total, there are c.34% of Indonesian population who smoke cigarettes, and c.94%
+6221 515 1140 (ext. 233) of these smokers consume clove-flavored kreteks, or cigarettes made of tobacco
natasya@miraeasset.co.id and cloves. Speaking of the kretek industry itself, the hand-rolled cigarettes
currently hold 20% of the market share, lower than the machine-made full-flavored
cigarettes which hold 38% and machine-made cigarettes (SKM) with low tar nicotine
which command 39%. The rest is insignificant, with non-kretek or white cigarettes
holding only 6% of the total market share. It is clearly evident that the machine-
made (SKM) type of cigarettes has gained market shares over the past 5 years,
rising from a total 65% in 2012 to 77% at present. The majority of the rising market
share is attributed to the full-flavored segment, which has increased by 10%p from
28% in 2012 to 38% in 2017. Given Indonesia’s high preference for clove cigarettes
(kretek), we believe the country will continue to put up a natural barrier for white
cigarettes (those composed of tobacco only) to gain market share. In addition,
global players have tried to launch clove cigarette on their own, which turned out to
be unsuccessful. Back in 1984, before acquiring HMSP, Philip Morris had tried to
enter the clove cigarette market, which did not end up successful as Indonesian
smokers still preferred locally produced clove cigarettes.
Favorable excise tax scheme for 2018F

In the latest PMK, the government stated that new brands’ minimum retail price
should not be lower than the existing brands owned by the cigarettes
manufacturers. Furthermore, the regulation now only allows for price discount
within 15% of the minimum retail price suggested by government. We believe the
government’s new regulation should benefit large cigarettes producers and bring
disadvantages to smaller players which sell cigarettes at a discounted price.
Furthermore, simplified excise tax brackets should benefit the bigger players. The
government has planned to simplify the excise tax layers from 10 layers in 2018 to 5
layers in 2021.
Initiate with an overweight stance

All in all, given the favorable environment towards cigarettes sector, we initiate
coverage on the tobacco industry with an overweight stance. Our top pick within the
sector is Gudang Garam (GGRM/ Trading Buy/ TP IDR91,000).
Tobacco companies covered in this report

Market cap Target price Gross margin (%) ROE (%) P/E (x)
Company name Ticker Rating
(IDRbn) (IDR/share) FY17F FY18F FY17F FY18F FY17F FY18F
HM Sampoerna HMSP Hold 494,351.8 4,310 24.3 24.1 37.6 39.4 36.9 34.3
Gudang Garam GGRM Trading Buy 155,033.4 91,000 21.5 21.9 17.5 18.8 20.5 17.8
Source: Mirae Asset Sekuritas Indonesia Research
PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES & DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT.
November 20, 2017 Tobacco
C O N T E N T S
Overview of Indonesia tobacco 3

Indonesia’s tobacco industry is too big to ignore 3
Five major players in the industry 6
Cigarette types in Indonesia 10
Types of cigarettes 10
Cigarettes tax structure 13
Indonesia’s framework of regulations on cigarettes 21
Breakdown of cost of goods sold 23
Industry’s mid- to long-term outlook 26
HM Sampoerna (HMSP) 28
HM Sampoerna 29
Company background 29
HMSP’s key brand families 31
Management team 36
Competitive advantage 39
3Q17 Performance review 46
Financial Forecast 49
Valuations 51
HM Sampoerna (HMSP IJ/ Hold/ TP: IDR4,310) 52
Gudang Garam (GGRM) 55

Gudang Garam 56
Company Background 56
Management team 59
Competitive advantage 62
Financial forecast 66
Valuations 67
Gudang Garam (GGRM IJ/ Trading Buy/ TP: IDR91,000) 68
Mirae Asset Sekuritas Indonesia Research 2

Overview of Indonesia tobacco
Indonesia’s tobacco industry is too big to ignore
Hefty cigarette consumption

Located in Southeast Asia with five main islands, Indonesia ranks as the fourth
most populated country in the world with more than 250mn inhabitants. This huge
population base has led to high domestic consumption, totaling more than fifty
percent of the nation’s economic output. Likewise, we believe that the country’s
high population has contributed to its status as the fourth largest cigarette market
in the world.
Figure 1. Contribution to GDP (%) Figure 2. Distribution of cigarette consumption
Private consumption
Government spending
Investments
32% Inventories
54%
Statistical discrepancy
Non-profit institutions
7% spending
Net exports
Source: Bloomberg, Mirae Asset Sekuritas Research Source: The Tobacco Atlas, Mirae Asset Sekuritas Research
In Indonesia, tobacco industry is considered one of the largest industries, given the
high domestic cigarette consumption, especially among Indonesian men.
According to data from the Ministry of Agriculture, buying cigarettes makes up the
third largest expenditure of Indonesians in their daily expenses, which indicates a
buoyant demand for cigarettes. The habit of smoking has eventually shaped the
culture and lifestyle of Indonesian consumers.
Figure 3. Percentage of average expenditure per capita per month
30%
25%
20%
15%
10%
5%
0%
Source: Ministry of Agriculture, Mirae Asset Sekuritas Research

It is estimated that around 95% of Indonesian smokers are male, leaving their
female counterparts measuring up to only c.5%. These figures may be related to
the presumption that consuming cigarettes for women is less socially acceptable in
Indonesia.
Indonesians’ love for kretek

In total, there are c.34% of Indonesian population smoking cigarettes, and c.94% of
these smokers consume clove-flavored kreteks, or cigarettes made of tobacco and
cloves. The Atlas, however, predicted that the number of smokers in Indonesia
would grow by merely c.3% CAGR over the next eight years.
Figure 4. Estimated number of smokers in Indonesia
100mn
Estimated no of smokers
120
97
100
80
60
40
20
0
2000 2005 2010 2015 2020 F 2025 F
Source: The Atlas, Mirae Asset Sekuritas Indonesia Research
Speaking of the kretek industry itself, the hand-rolled cigarettes (sigaret kretek
tangan/SKT) currently hold 17% of the market (Figure 6), lower than the machine-
made full-flavored cigarettes (sigaret kretek mesin/SKM) which hold 39% and
machine-made cigarettes (SKM) with low tar nicotine which command 39%. The rest
is insignificant, with non-kretek or white cigarettes representing only 5% of the
total market.
It is clearly evident that the machine-made (SKM) cigarettes have continued to gain
market share over the past 5 years, rising from 65% in 2012 to 77.6% at present.
This rising market share is mostly attributed to the full-flavored segment,
increasing by 11%p from 28% in 2012 to 39% in 2017.

Figure 5. Cigarette market share (2012) Figure 6. Current market share (as of 2016)
7%
5%
Hand rolled kretek (SKT) Hand rolled kretek (SKT)

17%
27%
Machine made kretek Machine made kretek
(SKM)- Full flavoured (SKM)- Full flavoured
37% 39%
Machine made kretek Machine made kretek
(SKM)- LTN (SKM)- LTN
Non kretek (White 39% Non kretek (White

28% cigarettes) cigarettes)
Source: Company data, Mirae Asset Sekuritas Research Source: Company data, Mirae Asset Sekuritas Research

Five major players in the industry

Indonesia’s tobacco industry is dominated by five large players that command a
total market share of 81.9%. Key tobacco manufacturers include: 1) HM Sampoerna
(HMSP), owned by Philip Morris International, with 33.1% market share; 2) Gudang
Garam (GGRM) at 21.2%; 3) Djarum (not listed) at 18.6%, and 4) British American
Tobacco Bentoel (RMBA) at 6.7%, and 5) Nojorono Tobacco Indonesia (not listed) at
2.8%. The remaining are smaller fragmented producers that hold 17.6% of the total
market share. The fact that two of the largest cigarettes companies are among the
ten largest Indonesian companies (in terms of market capitalization) listed on the
Indonesia Stock Exchange (IDX) speaks for the massive size of Indonesian tobacco
industry.
Figure 7. Market share of cigarette companies
(%) Market share (%)

35
30
25
20
15
10
0
HMSP GGRM Djarum RMBA Nojorono Others
Source: Company data, Bloomberg, Mirae Asset Sekuritas Research
Hanjaya Mandala Sampoerna (HMSP)

Hanjaya Mandala Sampoerna (HMSP) leads the industry by securing 33.1% of the
total cigarette market share, winning particularly in the mild machine-made
cigarette segment. HMSP is a subsidiary of PT Philip Morris Indonesia and an
affiliate company of Philip Morris International Inc, the world’s prominent
international tobacco company.
HMSP was established by Liem Seeng Tee, a Chinese immigrant who began his
business by producing and selling hand-rolled kretek cigarettes at his home in
Surabaya in 1913. His small business was among the ﬁrst to manufacture and
market kretek cigarettes under the brand Dji Sam Soe.

Figure 8. HMSP’s Dji Sam Soe and A brands
Source: Company data, Internet, Mirae Asset Sekuritas Research
Gudang Garam (GGRM)
Gudang Garam was initially founded by Surya Wonowidjojo in Kediri, East Java in
1958. In 1979, the company’s first cigarette manufacturing machines were installed.
The company has been listed on the Indonesian Stock Exchange (IDX) since 1990.
GGRM produces a wide range of kretek cigarettes, including low-tar-low-nicotine
variants (which are widely known to be light and mild), and traditional hand-rolled
kretek cigarettes. The company stands out with its machine-rolled full-flavor brand,
GG Surya.
Figure 9. GGRM’s brands
Djarum (not listed)
Djarum is the third largest cigarette company in Indonesia, founded by Oei Wie
Gwan of the Hartono family in Kudus, Central Java, in 1951. Djarum’s leading
brands include LA lights, Djarum Super, Djarum Super Mild, Djarum Coklat, and
Djarum 76.

Figure 10. Djarum’s domestic and international brands
Djarum Super Djarum Black Djarum Bali Hai
Djarum Black Capucinno
Djarum Coklat
Djarum Splash
Djarum 76 Djarum Black Tea

Djarum Cherry
L.A Lights Djarum Special Djarum Vanilla
L.A Lights Menthol Djarum Light Djarum Menthol
Bentoel International Investama (RMBA/not rated)
The fourth largest cigarette producer in Indonesia is Bentoel (RMBA/not rated).

Bentoel was established in 1930 by Ong Hok Liong, before being acquired by
Rajawali Group in 1991. RMBA’s top-selling brands include Dunhill, Club Mild, Star
Mild and Tali Jagat.
Figure 11. RMBA’s products

Nojorono Tobacco International
Nojorono, established in 1932, is located in Kudus, Central Java and is privately

owned by five families, which collectively control the company’s management. The
company’s market share has been declining from 5% in 2014 to merely 3%
currently. Some of Nojorono brands are Djinggo and Clas Mild.
Figure 12. Nojorono brands

Cigarette types in Indonesia

Types of cigarettes
Tobacco was first introduced to Asia in 1575, when the Spanish brought it to the
Philippines. It first stepped on the land of Java (Indonesia) in 1601, brought by
Portuguese traders. Therefore, the word tembakau (tembako in Javanese, and
tobacco in English) is phonologically closer to the Portuguese word tumbaco.
Cigarettes in Indonesia were initially home-produced; they were rolled and
wrapped in dried cornhusk, banana, or palm leaves. They were later called kelobot
(husk) in Javanese or strootje in Dutch. After a while, the strootjes made a
comeback by mixing tobacco with clove buds.
Although in the seventeenth century cloves were already mixed with tobacco, clove
cigarettes did not turn into a merchandise success before the 20th century. The
first person taking a step in that direction was a man residing in Kudus (Central
Java), who popularized clove cigarettes among his friends around 1870. The man
had the idea to mix tobacco with cloves and started to sell the hand-rolled
cigarettes. The new product was called rokok cengkeh, also known as kretek
(clove cigarettes). The word kretek itself is an onomatopoetic term for the crackling
sound of burning cloves. After his death in 1880, several other Kudus inhabitants
started to produce their own clove cigarettes, which at that time were wrapped in
cornhusk. The new product gradually gained popularity outside Kudus. It started
off from a home industry which employed hand-operated rollers, while the
factories performed the activities of collecting, controlling, packing, and
distributing the product. Kretek industry was initially dominated by the Javanese,
most of whom were Muslims living in Kudus and the surrounding regions. Later on,
several Chinese entrepreneurs were attracted to enter the kretek industry and soon
gained competitive advantage at an early stage of development. Indonesian
Chinese entrepreneurs that have played an important role in the history of kretek
industry are from the largest kretek companies, such as Djarum, Bentoel, Gudang
Garam (GGRM), Sampoerna (HMSP).
Before 1968, kretek cigarettes were rolled by hand, and only after 1968 did kretek
industry start using machines. At that time, three smaller companies located in Solo
and Kudus, including Bentoel, one of the prevailing brand leaders, began to
mechanize their production. Most of the larger enterprises which began producing
cigarettes with machines in the 1970s and 1980s were Djarum (1976), GGRM (1979),
and HMSP (1983). Currently, kretek cigarettes are either hand-rolled or machine-
rolled and wrapped like conventional cigarettes in cornhusks or in white, black, or
brown paper. In addition, they are manufactured both with and without filters. At
present, clove-typed or kretek cigarettes, made of tobacco and cloves and blended
with other flavors, are apparently the most popular tobacco products in Indonesia.
Furthermore, in terms of cigarette segment, there are presently 5 major types of

cigarettes, specifically segmented into two types, namely machine-rolled (SKM) and
hand-rolled (SKT).
 Rokok Klobot Kretek (KLB) - cornhusk paper that are made by hand
 White cigarettes - Sigaret Putih Mesin (SPM)
 Hand rolled cigarettes - Sigaret Kretek Tangan (SKT): filterless kretek
 Filtered hand rolled cigarettes - Sigaret Kretek Tangan Filter (SKTF):

hand-rolled, filter-tipped kretek
 Machine rolled cigarettes - Sigaret Kretek Mesin (SKM): machine-rolled,

filter kretek that is often identical to white cigarettes in appearance and
divided into: 1) lower tar and nicotine (LTLN), containing only 14-15mg and
1mg respectively; 2) mid tar nicotine, containing only 18-25mg and 1.2-
1.7mg respectively; and 3) full-flavored, containing only 31-32mg and 1.8-
2.2mg respectively.

Table 1. Machine-rolled cigarettes

Type Tar Nicotine
Lower tar and nicotine (LTLN) 14-15mg 1.0mg
Mid tar nicotine 18-25mg 1.2-1.7mg
Full flavored 31-32mg 1.8-2.2mg
Source: Mirae Asset Sekuritas Research
A natural barrier for foreigners to compete
Given Indonesia’s high preference for clove cigarettes (kretek), we believe the
country will continue to put up a natural barrier for white cigarettes, the ones
composed of tobacco only, to penetrate the market at a higher rate. As of 2016,
cloves cigarettes accounted for more than 80% of HMSP sales, and GGRM had no
white cigarettes in their product line up (100% kretek). In addition, global players
have tried to launch clove cigarettes on their own, but their attempts failed. Back in
1984 before acquiring HMSP, Philip Morris had tried to enter the market with their
own clove cigarettes, which did not end up successful as Indonesian smokers still
preferred locally produced clove cigarettes.
Figure 13. HMSP’s revenue breakdown Figure 14. GGRM’s revenue breakdown
Export Machine-made
1% clove cigarettes
9%
Machine-made Hand-rolled clove

clove cigarettes cigarettes
Corn silk clove

Hand-rolled cigarettes
20% clove cigarettes
Paperboard
White cigarettes
64%
Others
Others
90%
Source: Company data, Bloomberg, Mirae Asset Sekuritas Research Source: Company data, Bloomberg, Mirae Asset Sekuritas Research
Table 2. Fact findings about cigarettes

No. Facts
1 Cigarettes are generally divided into 3 groups: mild cigarettes, clove cigarettes and white cigarettes.
2 Mild cigarettes contain the lowest level of tar and nicotine content compared to clove cigarettes, and this is well controlled /
guaranteed by the manufacturer, becoming the selling points of these products in the name of health issues (according to
some research, tar and nicotine are usually related to cancer diseases).
3 Mild cigarettes have c.14-15mg of tar and 5mg of nicotine. Because of its lower tar and nicotine content, compared to kretek,
mild cigarettes are associated with the word light, for instances, LA Light and Marlboro Light.
4 The light content of tar and nicotine is made possible through: (a) a further processing of tobacco before finely chopped into
powder structure; and (b) the use of filter technology by wrapping the end of cigarette sticks with foam in order to filter out
the nicotine and tar (research has proven this to be effective).
5 White cigarettes are cigarettes that contain only tobacco, while clove cigarettes are cigarettes containing both tobacco and
cloves.
6 Kretek cigarettes have about 20mg of tar and 4-5mg of nicotine. The tar and nicotine content is larger than that of mild
cigarettes, so kretek cigarettes are said to have even worse effects on people’s health than regular cigarettes due to its higher
percentage of tar and nicotine. An example of kretek cigarettes brands is Dji Sam Soe (owned by HMSP).
7 Kretek cigarettes are made with a blend of tobacco, cloves and other flavors. The word kretek itself is an onomatopoetic term
for the crackling sound of burning cloves.
Source: Internet, Mirae Asset Sekuritas Research

Distribution channels for tobacco

According to Euromonitor, traditional grocery retailers, which mostly comprise toko
kelontongan (small grocery stores that sell all the basic needs), remained the most
important distribution channel for tobacco in Indonesia in 2016. Besides selling
cigarettes directly to consumers, these outlets also sell cigarettes in bulk to
traditional street-side kiosks, which are known as warung, as well as street vendors
(pedagang asongan). Although supermarkets, hypermarkets and especially
convenience stores have improved significantly as distribution channels for tobacco
over the review period, traditional grocery retailers still held onto the biggest
volume share during the year.
We believe street vendors and warung are key distribution channels for tobacco
manufacturers as cigarettes volume growth largely comes from single cigarettes
sold by street vendors to individual buyers who tend to purchase cigarettes per
stick rather than per pack.
Figure 15. Warung Figure 16. Street vendors
Source: Various internet sources, Mirae Asset Sekuritas Indonesia Research Source: Various internet sources, Mirae Asset Sekuritas Indonesia Research

Cigarettes tax structure
Indonesian government has been pushing to raise health awareness

Research by The Tobacco Atlas revealed that more than 200,000 Indonesians die
from tobacco-related diseases every year. In response to the health issues,
Indonesian government has been pushing to raise awareness of the health hazards
of smoking to reduce cigarette consumption, following the lead of many other
places in the world.
The government has also put regulations in place affecting the tobacco industry,
such as increasing the number of smoke-free areas, imposing a time limit on TV
cigarette advertisements, and hiking cigarette excise taxes which are widely known
as cigarettes’ excise duty ribbons that comprise of: 1) excise tax; 2) cigarettes tax
(10% of excise tax); and 3) VAT. For the VAT calculation, Indonesia uses banderol
price (suggested retail price from government’s regulation (Peraturan Menteri
Keuangan/PMK)) as the reference price. In some cases, the actual retail price for a
pack of cigarette might be lower than the banderol price (eg: GGRM’s Surya Pro
Mild is priced lower than its banderol price), which we believe is a strategy in order
to increase its sales volume. Note that Surya Pro Mild’s price is still within the
maximum 15% discount of the minimum retail price. Cigarettes are only subject to
a one-time VAT at the producer level, and the current rate is 9.1% of the banderol
price (suggested retail price).
We believe the government has, to some extent, achieved one of its goals, given
the declining volume growth in the industry in the recent years. In 2016, the
volume growth in Indonesia’s cigarette industry was stagnant at 1% YoY. Moreover,
in 2017, Philip Morris International estimated the country’s cigarette volume to
decline by around 3% YoY. On a separate note, for 2018, the government also
forecasts industry sales volume to decline by 3% YoY. We expect muted growth
next year, as we believe the pre-election year would drive up consumer demand,
especially cigarettes.
Figure 17. Cigarettes sales volume
(Bn Sticks)
Cigarettes sales volume (L) Volume growth (R)
316 3%
314
2%
312
310
1%
308
306 0%
304
-1%
302
300
-2%
298 -3%
296 -3%
2012 2013 2014 2015 2016 2017F 2018 F
Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research

Excise tax is one of the revenue sources for the government

Furthermore, as the government needs revenue to perform its tasks and functions,
tax becomes one source of revenue (as it contributes to more than 80% of the total
state’s annual budget revenue), and excise tax is one of the income sources of the
tax revenue. More than 90% of Indonesian government’s customs revenue comes
from cigarette taxes, and cigarette excise tax contributes to c.10% of total state’s
tax revenue.
Figure 18. Tax as % of state revenue Figure 19. Cigarette tax as % of total excise tax revenue
(IDRtr) State revenue (L) Tax as % of state revenue (R) (IDRtr) Excise tax revenue (IDRtr)
2,000 88% 180 %Cigarette tax revenue to total tax revenue 96.4%
1,800 86% 155
160 96.2%
96.1%
1,600 84% 140 96.0% 96.0%
1,400
82% 120 95.8%
1,200
80% 100 95 95.6%
1,000 95.5%
78% 80 95.4%
800 95% 95.3% 95.4%
76% 60 95.2%
600
400 74% 40 95.0%
200 72% 20 94.8%
- 70% - 94.6%
2012 2013 2014 2015 2016 2017F 2018F 2012 2013 2014 2015 2016 2017F 2018F
Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research
Table 3. Government revenue from tax

2012 2013 2014 2015 2016 2017F 2018F
Total tax revenue (IDRtr) 981 1,077 1,147 1,226 1,285 1,473 1,609
Excise tax revenue (IDRtr) 95 108 118 128 144 153 155
Cigarettes tax revenue (IDRtr) 91 104 113 123 138 148 148
Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research
Figure 20. % of excise tax to total tax revenue Figure 21. Gov’t revenue generated mostly from tax
(IDRtr)
12% % excise tax to total tax revenue Excise tax revenue (L) Other tax revenue (L) % Excise to total tax revenue (R)
11.2% 1,600 12%

11%
1,400 11.2%
11%
10% 9.7% 1,200
11%
1,000
9%
800 10%
8%
7.8% 600 9.7%
10%
7% 400
9%
200
6%
- 9%
2012 2013 2014 2015 2016 2017F 2018F
Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research

Indonesia implements a tiered tax system for cigarettes excise tax

Excise taxes on cigarettes have been levied on Indonesia’s cigarettes since early
1900s. In 1932, the tax rate was the same for all types of tobacco products, which
was c.20%. Nevertheless, since 1936, a tiered tax system for cigarettes was
instigated with regards to the following types of products: hand-rolled kretek
(tobacco and clove cigarettes), klobot (kretek wrapped in cornhusk), and white
cigarettes (tobacco only). Later on, differential excise tax rates for both hand-rolled
and machine-rolled kreteks were introduced to the industry.
In the 1970s, the tax system was modified based on: 1) production volume; 2)
cigarette type (hand-rolled kretek, machine-made kretek, or machine-made white
cigarettes); and 3) price, with the highest tax rates corresponding to companies
with the highest production volume. We believe that hand-rolled products and
companies with smaller scale production levels have consistently enjoyed the most
favorable tax rates and that smaller cigarette producers enjoyed higher margins
due to less excise tax paid compared to bigger players.
The excise taxes for machine-made, hand-rolled and white cigarettes have
increased by an average of 10% (see Figure 27). Nevertheless, the excise tax
increase for hand-rolled cigarettes has remained relatively low than that of the
machine-rolled cigarettes and white cigarettes in the past three years (Figure 23).
The lower excise tax increase for hand-rolled cigarettes is most likely because the
hand-rolled segment is already contracting, whereas the machine-made cigarettes
volume is still growing. In addition, we believe the government continues to favor
the smaller and hand-rolled cigarette factories since they are more labor-intensive.
Figure 22. Cigarette excise tax per stick by category
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Government's retail Banderol
Type of cigarettes Group Production group (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK
price (HJE) Tier
203/ 2008) 181/2009) 190/2010) 167/2011) 179/2012) 179/2012) 205/2014) 198/2015) 147/2016) 010/2017)
(sticks) (IDR/stick) IDR IDR IDR IDR IDR IDR IDR IDR IDR IDR
A 290 310 325 355 375 375 415 480 530 590
I >3bn 1,120 B 280 300 315 345 480
355 355 415
C 260 280 295 325
Machine rolled
895 A 210 230 245 270 285 285 305 340 365 385
II Not more than 3bn B 175 195 210 300 335 370
715-895 235 245 245 265
C 135 155 170
A 290 310 325
I >3bn 1,130 B 230 275 295 365 380 380 425 495 555 625
C 185 225 245
White cigarettes
935 A 170 200 215 235 245 245 270 255 330 370
II Not more than 3bn B 135 165 175 190 290 355
640-935 195 195 220
C 80 105 110 125
1,260 A 200 215 235 255 275 275 290 320 345 365
I >2bn B 150 165 180 245 265 290
890-1260 195 205 205 220
C 130 145 155
A 90 105 110 125 130 130 140 155 165
>50mn but not more
Hand rolled II 470 B 80 95 100 115 120 120 140 155 180
than 2bn 125
C 75 90 90 105 110 110
>50mn but not more
III A A 40 65 65 75 80 80 85 90 100
than 350mn 400 100
III B Not more than 50mn B 80 80 80
No of layers 19 19 19 15 13 13 13 12 12 10
Source: Ministry of Finance, Customs and Excise Tax Office, Mirae Asset Sekuritas Indonesia Research

Figure 23. Cigarette excise tax increase by category
Type of cigarettes 2009 2010 2011 2012 2013 2014* 2015 2016 2017 2018
Government's retail Banderol
Group Production group (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK
price (HJE) Tier
203/ 2008) 181/2009) 190/2010) 167/2011) 179/2012) 179/2012) 205/2014) 198/2015) 147/2016) 010/2017)
(sticks) (IDR/stick)
Machine rolled I >3bn A 7% 5% 9% 6% 0% 11% 16% 10% 11.3%
1,120 B 7% 5% 10% 3% 0% 17%
(SKM) C 8% 5% 10% 9%
II Not more than 3bn 895 A 10% 7% 10% 6% 0% 7% 11% 7% 5.5%
B 11% 8% 13% 12% 10%
715-895 12% 4% 0% 8%
C 15% 10%
White cigarettes I >3bn A 7% 5%
1,130 B 20% 7% 12% 4% 0% 12% 16% 12% 12.6%
(SPM) C 22% 9%
II Not more than 3bn 935 A 18% 8% 9% 4% 0% 29% 12%
B 22% 6% 9% 3% 0% 13% 16% 14% 22%
640-935
C 31% 5% 14%
Hand rolled I >2bn 1,260 A 8% 9% 9% 8% 0% 5% 10% 8% 5.8%
B 10% 9% 8% 5% 0% 11% 8% 9%
890-1260 7%
C 12% 7% 26%
(SKT) II >50mn but not more A 17% 5% 14% 4% 0% 8% 11% 6%
9%
than 2bn 470 B 19% 5% 15% 4% 0% 12% 11%
4%
C 20% 0% 17% 5% 0%
>50mn but not more
III A A 63% 0% 15% 7% 0% 6% 6% 11% 0%
than 350mn 400
III B Not more than 50mn B 0% 0%
Simple average 17% 6% 12% 5% 10%* 9% 11% 11% 10%
Tax revenue is expected to move up in parallel with the state budget growth;
hence, higher excise tax every year is deemed to be normal as the government also
needs to increase their state revenue. However, we view higher taxes for high-end
cigarettes as a double-edged sword for the government, as they would incentivize
the growth of illicit cigarette market as some smokers turn to cheaper illegal
cigarettes given the tax rate gap between high-end and low-end cigarette are
pretty huge. Therefore, in five years ahead, the government has been proposing to
cut the number of excise tax layers into five, from previously nineteen (in the past
eight years), in order to close in the gap of the cigarette tax rates, which inevitably
has forced the number of smaller players in the industry to increase prices and lose
competitiveness against the bigger players. We have seen government’s
advancement to simplify the tax structure. For 2018F, the government has reduced
the excise tax layers further into 10 from 12 in 2017.

Government to increase excise tax by 10.04% in 2018F

In the proposed state budget for 2018 (RAPBN 2018), the government expects
excise duty revenue target to increase by only 1.5% YoY (from APBNP 2017), with
cigarette tax revenue increasing by merely 0.5% YoY. According to Ministry of
Finance Regulation No. 146/ PMK 010/ 2017, the government sets the 2018F excise
tax per stick to increase by an average of 10.04%. We believe the government is
anticipating a small increase in cigarette excise tax revenue due to their
expectation of lower volume next year. Therefore, an average excise tax increase of
10.04% should rather be viewed as in line since it is already below this year’s excise
tax hike of 10.5%.
The highest excise tax is applicable to white cigarette (SPM) at 12.6%, which we
believe will hurt SPM cigarette volume further. As of 9M17, total industry’s white
cigarette volume has already dropped by 16% YoY with HMSP’s SPM volume
declining by 25%YoY. On the other hand, government is supporting the SKT
segment by setting the lowest excise tax increase of a mere 5.8% YoY for the
highest tier of hand-rolled (SKT) cigarettes. Furthermore, the highest tier of
machine-rolled (SKM) cigarette segment which increases by 11.3% YoY (Figure 23)
will likely lead to a flat volume growth next year.
Figure 24. Cigarette tax revenue in 2018 draft state budget Figure 25. Tax as % of GDP
(IDRtr) Cigarettes tax revenue (L) Cigarettes tax revenue growth (R) (IDRtr) Total tax revenue (IDRtr) tax as % of GDP
1,400 12.5%
160 16% 12.0%
1,200
140 14% 11.4% 11.5%
120 12% 1,000
10.6% 11.0%
100 10% 800 10.4% 10.5%
80 6.9% 8%
600 10.0%
60 6%
9.5%
40 4%
400
9.0%
20 0.5% 2% 200
8.5%
- 0%
LKPP 2012 LKPP 2013 LKPP 2014 LKPP 2015 LKPP 2016 APBNP 2017 RAPBN 2018 - 8.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Ministry of Finance, Mirae Asset Sekuritas Indonesia Research Source: Ministry of Finance, Bloomberg, Mirae Asset Sekuritas Indonesia Research
Figure 26. Cigarettes industry volume growth (yoy)
SKM SKT SPM Industry
5%
0%
-1.6%
-3.1%
-5%
-10% -4.7%
-15%
-16.4%
-20%
-25%
1Q16 1H16 9M16 FY16 1Q17 1H17 9M17
Source: PMI US, Mirae Asset Sekuritas Indonesia Research

In addition, the increased cigarette excise tax is actually normal as it usually hovers
at 8-12% YoY. Thus, its recent change to an incremental excise tax scheme indicates
the government’s support for the consolidation in the industry. In our view, the
number of illicit cigarettes traders in Indonesia has become one of the
government’s reasons to aggressively raise the excise tax. Hence, we believe that
cigarette tax increase can limit the number of illicit cigarette companies since,
assuming they are selling at the same price, consumers would prefer buying bigger
cigarette brands.
Figure 27. Excise tax hike per year
16%
Excise tax hike average
14%
12%
10%
8%
6%
4%
2%
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018F
As the excise tax makes up c.70% of cigarette companies’ cost of revenue, the
expectation of 10% excise tax growth should hurt companies’ cost of sales, as well
as their margin (assuming that tobacco and clove prices will remain the same next
year). However, in order for those cigarette companies to retain their margins, we
expect that cigarette companies need to raise ASP by c.8% in 2018F to compensate
for the excise tax increase.
For 2018F, we expect a muted volume growth as we anticipate moderate cigarette

consumption during the pre-election year. We note that in 2016, cigarette tax
collection missed the target of the initial state budget by 7.3%, which we attribute
to weak volume growth. Meanwhile, we believe the cigarette excise revenue would
miss the revised state budget in 2017 by c.5%. This fact, coupled with aggressive
excise tax hike, means that we expect a lower realization of their budget as we
expect a muted volume growth. In the long run, given the shortfall of state budget
as well as the declining tax revenue as % of GDP, we view that excise tax increase
will likely pose more risks for the cigarette sector.

Low tobacco tax rate as % of government retail price
We see that Indonesia’s excise tariff as % of government retail price has been
volatile. However, although the increase in tax rates between the year of 2015 and
2017 was quite significant, the excise tariff as a percentage of the government
retail prices went down. We believe this is mainly due to the fact that, in absolute
terms, Indonesia’s cigarette manufacturer has been able to overcome the excise
tax hike, as the price increase was larger than the tax increase, which in turn
diminished the effect of the excise tariff hike.
Nevertheless, Indonesia has presently been capping its tobacco excise tariff rate
as % of government retail price at 57% according to PMK No146/PMK.010/2017.
The tobacco tax as % of government retail price is much lower than the WHO
benchmark, set at 75%. Therefore, we believe that at the current level, Indonesia’s
tobacco industry seems to have a better taxation scheme, compared to the
neighboring countries, such as Vietnam and Malaysia.
Table 4. Excise tax increase and tariff as % of Gov’t retail price

2009 2010 2011 2012 2013 2014 2015 2016 2017F 2018F
Government regulation (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK (PMK
203/2008) 181/2009) 190/2010) 167/2011) 179/2012) 179/2012) 205/2014) 198/2015) 147/2016) 010/2017)
Excise tax hike (average) 17.0% 6.0% 11.5% 4.8% 0.0% 9.4% 11.3% 10.5% 10.0%
VAT 8.4% 8.4% 8.4% 8.4% 8.4% 8.4% 8.7% 9.1% 9.10%
Tax rate - - - - 10% 10% 10% 10% 10%
Machine-rolled excise tax per stick 290 310 325 355 375 375 415 480 530 590
(>2bn of produced sticks)
Machine-rolled (>2bn of produced 7% 5% 9% 6% 0% 11% 16% 10% 11%
sticks) excise tax increase
Gov’t retail price increase 0% 0% 0% 1% 0% 20% 25% 12% 0%
Excise tariff as % of Gov’t retail price 43.9% 47.0% 49.2% 53.8% 56.1% 56.1% 51.9% 48.0% 47.3% 52.7%
(HJE) on machine-rolled cigarettes
Source: Peraturan Menteri Keuangan, Mirae Asset Sekuritas Indonesia Research estimates
Figure 28. Excise tariff as % of government retail price
80%
70%
60% 57.5%
50%
40%
30%
20%
10%
0%
Source: Director General of Customs, Mirae Asset Sekuritas Research

Along with the excise tax, the government also increased the 2018F minimum retail
price (HJE) by 3.7% for hand-rolled cigarettes to IDR1,260/stick and by 9.7% for
white cigarettes to IDR1,130/stick. Meanwhile, the minimum retail price for
machine-rolled (SKM) cigarettes is flat at Rp1,120/stick (figure 29). The government
also stated that new brands’ minimum retail price should not be lower than the
existing brands owned by the cigarettes manufacturers. Furthermore, the
regulation now only allows for price discount within 15% of the minimum retail
price suggested by government. We believe this new regulation should benefit big
cigarettes players and bring disadvantages to smaller players which sell cigarettes
at discounted prices. In addition to that, the simplified excise tax brackets should
benefit the bigger players. The government has planned to simplify the excise tax
layers from 10 layers in 2018 to 5 layers in 2021.
Figure 29. Minimum retail price (HJE)
IDR/stick 2017 2018
1,400
1,200
1,000
800
600
400
200
-
Machine-rolled cigarettes White cigarettes Hand-rolled cigarettes
Source: PMK, Mirae Asset Sekuritas Indonesia Research
Table 5. Government’s simplified excise tax structure

Year # of Layer
2018F 10
2019F 8
2020F 6
2021F 5
Source: PMK, Mirae Asset Sekuritas Indonesia Research

Indonesia’s framework of regulations on cigarettes

Until now, Indonesia has not yet signed the Framework Convention on Tobacco
Control (WHO FCTC), which is the first global public health treaty under WHO. The
FCTC is a health treaty under WHO that lays out specific regulations for any
countries to help protect the consumers.
Table 6. Framework Convention on Tobacco Control

No Regulations
1 Protect from exposure to tobacco smoke in indoor workplaces, public transport, indoor public places and, as
appropriate, other public places;
2 Eliminate illicit trade of tobacco products, including smuggling, illicit manufacturing and counterfeiting, and the
development and implementation of related national law ;
3 Undertake a comprehensive ban on all tobacco advertisings, promotions, and sponsorships;
4 Limit tobacco product packaging and labelling in order to minimize promoting tobacco products by any means that are
false, misleading, deceptive or likely to create an erroneous impression about its characteristics, health effects, hazards
or emissions, including any term, descriptor, trademark, figurative or any other signs that directly or indirectly create the
false impression that a particular tobacco product is less harmful than other tobacco products, including terms such as
“low”, “light”, “ultra-light”, or “mild”;
5 Apply health warnings describing the harmful effects of tobacco use, and these may include other appropriate messages
covering at least 30% of a cigarette pack;
6 Implement tax policies on tobacco products so as to contribute to the health objectives aimed at reducing tobacco
consumption.
Source: WHO FCTC, Mirae Asset Sekuritas Indonesia Research
While there are 181 countries that have signed the treaty by 2016, Indonesia is
among the few that have not done so. This is not surprising since the president,
Jokowi, wants to protect the livelihood of tobacco farmers and cigarettes industry’s
labors.
In return, Jokowi proposed a regulation to: 1) reduce imported tobacco; 2) increase

excise tax on imported tobacco; 3) increase the cigarette excise tax rate; and 4) limit
public smoking space. In addition to that, through PP No 19/2003, the government
has been slowing down cigarettes growth in order to maintain the consumers’
health by controlling the content of nicotine and tar levels, giving certain
requirements for companies in producing cigarettes, as well as limiting cigarettes
advertisements and promotions. Therefore, we believe if the FCTC is signed, the
impact would be rather minimal as Indonesia has already complied with many of
the FCTC regulation requirements.
Nonetheless, in addition to supporting local farmers and the cigarette industry,

which therefore will benefit big players, we believe that the government recently
seems to also encourage industry consolidation by lowering excise tax rates on
tobacco, as well as proposing to cut the number of layers of excise taxes into 10,
from previously twelve. Moreover, the government proposed the tax layer to be cut
into only five in the next five years.
We believe that the smaller number of tax layers would close in the wide price gaps
among cigarette brands as smaller players will have to increase their average
selling prices (ASPs) and thereby lose their competitive pricing over the bigger
companies. We also believe that the lesser number of layers will impel the
government to control the emergence of smaller cigarette companies. Indeed,
according to the Director General of Customs, the number of tobacco factories has
decreased from 4,198 in 2006 to only 713 in 2015.

Figure 30. Decreasing number of tobacco factories
5,000
Number of tobacco factories
4,500 4,198
4,000
3,500
3,000
2,500
2,000
1,500
1,000 713
500
-
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Source: Director General of Customs, Mirae Asset Sekuritas Research

Breakdown of cost of goods sold

Excise duty ribbons which include: 1) excise tax, 2) VAT, and 3) cigarettes tax
constitute the largest cost components for both HMSP and GGRM (see Figures 31
and 32). Given these largest components of cost of revenue, we believe that a
significant increase in excise tax will pose the ultimate risk for the company.
Following the excise duty ribbons (comprising of more than 70% of cigarettes
companies’ COGS) as the second largest components of cost of revenue for those
cigarettes companies are tobacco (c.10-11% of total COGS) and cloves (4-5% of total
COGS).
Figure 31. HMSP’s COGS breakdown as of 2016 Figure 32. GGRM’s COGS breakdown as of 2016
14% 10% 11% 11%

5%
4%
Tobacco
Tobacco
Cloves
Cloves
Excise duty Excise duty

ribbons ribbons
71% 74%
Others Others
Source: Company data, Mirae Asset Sekuritas Indonesia research Source: Company data, Mirae Asset Sekuritas Indonesia research
Almost all cloves are locally sourced. On the contrary, due to lack of supply, tobacco
leaves are mostly imported, with an exception to GGRM, which sources most of its
tobacco leaves locally. The company stated that they want to source everything
locally to maintain their costs in Rupiah base. In addition, the company believes
that buying tobacco locally would support the livelihood of local tobacco farmers
who are mostly kretek smokers.
Figure 34. Indonesia’s import volume of estate crops

Figure 33. Indonesia’s tobacco suppliers
commodities (Ton)
'000 Ton
(Ton)
45 Tobacco Clove
40
160,000
35
140,000
30
25 120,000
20 100,000
15 80,000
10
60,000
5
40,000
-
20,000
-
2011 2012 2013 2014 2015
Source: Kata Data News and Research, Mirae Asset Sekuritas Indonesia Source: Ministry of Agriculture, Mirae Asset Sekuritas Indonesia research

We predict the volatility of raw material prices (tobacco and clove) to also be a
threat to cigarette companies, although less significant compared to the excise
given the smaller composition to the total cost of goods sold (COGS). Nonetheless,
in our view, cigarette companies will gradually pass on this cost increase to the
consumers. We also believe that HMSP has a greater import component compared
to GGRM, provided the global supply chain from Phillip Morris.
Table 7. Component of tobacco and cloves in different types of cigarettes

Types of cigarettes Component Tobacco & Cloves composition
±60% tobacco
SKT 2gr
±40% cloves
±70% tobacco
SKM – Full flavored 1gr
±30% cloves
±70% tobacco
SKM – Light & Mild Less than 1 gr
±30% cloves
Source: Company data, Mirae Asset Sekuritas Indonesia Research
Furthermore, the prices of cloves are typically believed to be more volatile than
tobacco leaves as big cigarette companies normally purchase tobacco leaves in
bulk to support their raw material continuity since demands may spike up
suddenly, given the harvesting season which is only yearly. Tobacco leaves can be
stored for nine months to up to three years. Currently, tobacco leaves can only be
found in five main regions, namely Bojonegoro, Lombok, Temanggung, Jember and
Paiton (East Java).
On the contrary, cloves are available throughout Indonesia that its harvesting
months are spread within a year. Therefore, unlike the tobacco leaves, big cigarette
companies do not normally keep cloves up until three years (usually c.9month -14
months).
Currently, Indonesia’s clove production is roughly between 70,000MT ~100,000 MT,

depending on the climate. The majority of the production (c.90%) is consumed
locally by cigarette manufacturers of various local and international brands. In
2011, Indonesian Clove Farmers Association (Asosiasi Petani Cengkih
Indonesia/APCI) requested the government to import clove as the nation's harvest
was poor and could only supply 30% of the tobacco industry's clove demand. Back
then, companies used to hold limited clove reserves and were therefore afflicted by
surging clove prices. At that time, clove prices hiked up to IDR220,000/kg (from only
IDR50,000/kg a year before). Currently, clove prices hover between
IDR120,000~IDR140,000/Kg.
We believe big cigarette companies now safeguard ample clove reserves, owing to
their bad experiences in 2011. Currently, cigarettes companies keep their inventory
of raw materials (tobacco and cloves) as a buffer in the event of significant
increases in tobacco and clove prices. As of 2016, GGRM kept 782 days of raw
material inventory, while HMSP kept 446 days of raw material inventory.

Figure 35. Inventory days
(days) GGRM HMSP
900
782
800
700
600
500 458
400
300
200
100
0
2012 2013 2014 2015 2016

Industry’s mid- to long-term outlook

Favorable demographics and growing number of young smokers
We believe Indonesia’s huge cigarette’s industry and growth drivers are backed up
by the government’s support towards this labor-intensive industry by protecting
the livelihood of small tobacco farmers and industry’s labors.
In addition, Indonesia has numerous growth drivers in this sector, such as its
favorable demographic profile (50.8% of the population are in the age range of 24-
54), low real cigarette prices, vast population, rising household income, low excise
tax as percentage of cigarettes’ retail price, as well as high pricing power of the big
players holding the market share of the tobacco industry.
Figure 36. Indonesia’s young demography
Source: United Nations, Department of Economic and Social Affairs, Mirae Asset Sekuritas Research
The regulation on the minimum age to smoke or buy cigarettes in Indonesia is

more lenient than in other countries, and as a result, the number of young smokers
in Indonesia keeps increasing, in our view. According to the National Commission
for Children's Protection, nearly 2% of Indonesian children start smoking at the age
of four. In addition to that, Basic Health Riset reveals that the number of teenage
smokers in Indonesia almost reached 25% as of 2016, gradually improving
compared to 10 years ago (Figure 37).
We believe that the large number of Indonesian young generations taking up

smoking is due to the accessibility of buying a single cigarette, rather than one
whole package. Thus, despite increased taxes on tobacco, young people still find it
affordable to buy a standard pack of 16 cigarettes, priced at around IDR13,000-
IDR22,000/pack and available at many street stalls, which also sell single cigarettes
for as cheap as c.IDR1,000-IDR1,200/stick.

Figure 37. Young smokers in Indonesia
% 10-14 years old 15-19 years old
25
20
15
10
0
2007 2010 2013 2016
Source: Basic Health Riset (2007,2010,2013), Mirae Asset Sekuritas Research
Expecting moderate industry growth in 2018F

We expect next year’s regional government election (June 2018) and pre-election
period (the start of presidential campaign in October 2018) to entice the purchasing
power of mid- to low-income consumers and thus spur better growth for
Indonesia’s cigarette industry. In addition, we do not see that a higher increase in
excise tariff by 10.04% is a big risk to the consumption of cigarettes as it is still
within the normal range of its historical. In addition, cigarettes companies will
carefully increase their ASP next year in order to pass on their cost of goods sold.

HM Sampoerna (HMSP)
Hefty valuation
HMSP is a top-listed tobacco company that manufactures and distributes cigarettes

in Indonesia. Currently, the company leads the industry by holding 33.1% of the
(Initiate) Hold total cigarette market share. Machine-made cigarettes contribute to the majority of
HMSP total revenue (>60% of HMSP’s revenue) with mild segment contributing
more than the machine-made full-flavor, followed by hand-rolled cigarettes at 20%,
Target Price (12M, IDR) 4,310 and white cigarettes at 15%. Meanwhile, HMSP’s export market contributes
insignificantly to the company’s revenue at less than 1% of HMSP’s consolidated
Share Price (11/17/17, IDR) 4,100 revenue. HMSP is a subsidiary of PT Philip Morris Indonesia and an affiliate
company of Philip Morris International Inc, the world’s leading international
Expected Return 5.1% tobacco company.
OP (18F, IDRbn) 17,396 Solid balance sheet- small debt and manageable capex going forward
Consensus OP 18F, IDRbn) 18,187
Since 2015 (the year when the company did a rights issue to comply with the free
EPS Growth (18F, %) 8.1 float requirement), HMSP’s debt has been very small as the company boosted up its
Market EPS Growth (18F, %) 16.6
cash ever since the rights issue. In addition, although the company has greater
P/E (18F, x) 34.3
Market P/E (18F, x) 28.9 financial stability, the company requires only minimal capex ahead as their current
Market Cap (IDRbn) 496,678.2 capacity can fulfill the market demand for cigarettes. The company only needs
Shares Outstanding (mn) 116,318.1 capex of c.IDR1.1-IDR1.2tr per year for repair and maintenance. Thus, we believe
Free Float (%) 7.5 HMSP will have a positive free cash flow going forward, given our assumption that
Foreign Ownership (%) 2.1 its capital expenditure as percentage of sales will just be stable.
Beta (12M) 1.2
52-Week High 4,340 Diversified products to cater to all segments of target market
52-Week Low 3,350
(%) 1M (%) 1M Currently, HMSP sells machine-rolled mild cigarettes (SKM mild) with three market
Absolute 4.9 5.9 8.5 segments, such as A mild for the premium market, U mild for the middle market,
Relative 3.1 -0.2 -8.1 and Magnum Mild for the mid- to low-end market. Meanwhile, for the machine-
rolled full flavor (SKM FF), HMSP has three market segments, such as Dji Sam Soe
(D-1yr=100) JCI HMSP Magnum Filter 12 for the premium market, Marlboro Filter Black for the middle
125 market and U Bold for the mid- to low-end market.
115
105 Initiate with a Hold call (TP: IDR 4,310/share)
95
85 We initiate our coverage on HMSP with a hold rating and a target price of
11/16
12/16
1/17
1/17
2/17
3/17
3/17
4/17
5/17
5/17
6/17
7/17
7/17
8/17
9/17
10/17
10/17
11/17
IDR3,410/share, which was derived by using a 2018F target multiple of 38x. We like
HMSP on the back of its strong position in the cigarette market, despite its recent
declining market share. Nevertheless, its premium valuation and declining market
share of its flagship brands, which we believe has higher margins, such as
Sampoerna A and Sampoerna U (SKM Mild), lead to our hold recommendation. In
addition, HMSP’s SKM FF brands (U Bold and Marlboro Filter black) might
deteriorate the company’s margins.
2014 2015 2016 2017F 2018F

Revenue (IDRbn) 80,690 89,069 95,467 100,203 107,906
Gross Profit (IDRbn) 20,500 21,764 23,855 24,388 26,028
Operating Profit (IDRbn) 13,805 14,048 16,020 16,371 17,396
Net profit (IDRbn) 10,181 10,363 12,762 12,918 13,923
EPS (IDR) 88 89 110 111 120
BPS (IDR) 116 275 294 295 304
P/B (x) 35.3 14.9 14.0 13.9 13.5
P/E (x) 46.8 46.0 37.4 36.9 34.3
Note: All figures are based on consolidated FS

HM Sampoerna
Company background
Hanjaya Mandala Sampoerna (HMSP) is a top-listed tobacco company that
manufactures and distributes cigarettes in Indonesia. The company is a subsidiary
of PT Philip Morris Indonesia and an affiliate company of Philip Morris International
Inc, the world’s leading international tobacco company. Other than machine-made
cigarettes (SKM), HMSP also produces hand-rolled cigarettes (SKT) and distributes
the product of PT Philip Morris Indonesian (PMID), Marlboro, in Indonesia.
Currently, HMSP leads the industry by holding 33.1% of the total cigarette market
share as of 3Q17. Machine-made cigarettes contribute to the majority of HMSP
total revenue (>60% of HMSP’s revenue) with mild segment contributing more than
the machine-made full-flavor, followed by hand-rolled cigarettes at 20%, and white
cigarettes at 15%. Meanwhile, HMSP’s export market contributes insignificantly to
the company’s revenue at less than 1% of HMSP’s consolidated revenue.
Figure 38. Market share of cigarette companies Figure 39. Revenue breakdown (IDRbn)
Machine made clove cigarettes (SKM)
(%) Market share (%) IDRbn Hand rolled clove cigarettes (SKT)
35 White Cigarettes (SPM)
80,000 Others
Export
30 70,000
25 60,000
50,000
20
40,000
15
30,000
10
20,000
5 10,000
0 0
HMSP GGRM Djarum RMBA Nojorono Others 2010 2011 2012 2013 2014 2015 2016 2017 F 2018 F
Source: Company data, Nielsen, Mirae Asset Sekuritas Research Source: Company data, Mirae Asset Sekuritas Research
Figure 40. HMSP’s revenue breakdown Figure 41. HMSP’s quarterly volume sales by segment
Export bn sticks White Hand-rolled Machine-made
Others
White Cigarettes (SPM)
Hand rolled clove cigarettes (SKT) 30
Machine made clove cigarettes (SKM)
28
100%
26
90% 2.7
24
80% 3.5 3.1
20% 22
70%
5.3
60% 20
4.7 4.8
50% 18
40%
16
30% 64%
14 18.3
20% 16.7 17.0
10% 12
0% 10
2012 2013 2014 2015 2016 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
Source: Company data, Mirae Asset Sekuritas Research Source: Company data, Mirae Asset Sekuritas Research

HMSP was established by Liem Seeng Tee, a Chinese immigrant who began his
business by producing and selling hand-rolled kretek cigarettes at his home in
Surabaya in 1913. His small business was among the ﬁrst to manufacture and
market kretek cigarettes under the brand Dji Sam Soe. In 1959, HMSP’s operation
was then passed on to the second generation of the family, Aga Sampoerna, who
focused on the production of SKT (hand-rolled cigarettes). The company turned into
a public company in 1990.
The company produces some of the best-known kretek (clove) cigarette brand
families, such as Sampoerna A, Sampoerna Kretek, Sampoerna U, and Dji Sam Soe,
which is considered the legendary “King of Kretek.” Given the success of its
business, HMSP drew the interest of PT Philip Morris Indonesia, which has acquired
the majority of ownership of HMSP in May 2005.
Figure 42. HMSP’s brands
Source: Company data, Mirae Asset Sekuritas Research
Figure 43. HMSP’s revenue breakdown by volume
Export SPM SKT SKM

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2011 2012 2013 2014 2015 2016 2017 F 2018 F
Source: Company data, Mirae Asset Sekuritas Research

HMSP’s key brand families
Sampoerna A brand family comprises of SKM variants. Sampoerna launched A Mild

in 1989, which became a pioneer in the LTLN (low tar low nicotine) cigarette brand
in Indonesia.
Figure 44. The Sampoerna A brands
Table 8. The Sampoerna A brands

Type Launching year Tar Nikotin
A Mild 16 1989 14 mg 1.0 mg
A Mild 12 1998 14 mg 1.0 mg
A Mild Menthol 16 1998 14 mg 1.0 mg
A Gold 2013 14 mg 1.0 mg
A Mild Blue 2015 14 mg 1.0 mg
A Motion 2015 14 mg 1.0 mg
A Flava 2010 14 mg 1.0 mg
A Flava Bold 2010 14 mg 1.0 mg
Source: Wikipedia, Company data, Mirae Asset Sekuritas Research

Table 9. A Mild Slogan

Slogan Year
A Mild How Low Can You Go? 1994-1996
A Mild Bukan Basa Basi 1996-2008
A Mild Others can only follow 2002-2004
A Mild Tanya Kenapa? 2005-2008
A Mild Go Ahead 2009- Now
A Mild Menthol: Go Ahead Refresh 2014- Now
A Mild Limited Edition: Open New Ways 2015- Now
Dji Sam Soe is the first SKT brand produced by Handel Maatschappij Liem Seeng
Tee, which later became Hanjaya Mandala Sampoerna.
Dji Sam Soe has both variants of SKT and SKM brands. Dji Sam Soe is positioned as
a premium kretek brand in Indonesia and continues to be the leader in the SKT
segment. Dji Sam Soe’s SKM segments are Dji Sam Soe Filter, Dji Sam Soe Magnum
Filter, and Dji Sam Soe Magnum Blue (launched in early 2014), while Dji Sam Soe
SKT’s segments include Dji Sam Soe Kretek and Dji Sam Soe Super Premium.
Sampoerna’s SKT products, namely Dji Sam Soe (established since 1913) and
Sampoerna Kretek, are still manufactured by hand today in 5 Sampoerna's
manufacturing facilities and 38 facilities that belong to the third party’s operators
throughout Java.
Figure 45. Dji Sam Soe display at House of Sampoerna (Surabaya)
Table 10. Dji Sam Soe (without filter)

Type Details
Dji Sam Soe 234 10 sticks
Dji Sam Soe 234 Tin of 50 sticks
Dji Sam Soe 234 Super Premium

Table 11. Dji Sam Soe (with filter)

Type Details
Dji Sam Soe 234 Filter
Dji Sam Soe 234 Super Premium
Dji Sam Soe 234 Gold
Dji Sam Soe 234 Magnum Filter
Dji Sam Soe 234 Magnum Blue
Dji Sam Soe 234 Super Premium Masterpiece
Dji Sam Soe 234 Super Premium Magnum Filter
Dji Sam Soe 234 99 Limited Edition
Dji Sam Soe 234 100th Tin Case
Figure 46. Dji Sam Soe’s brands
Source: Internet, Company data, Mirae Asset Sekuritas Research
Sampoerna Kretek is a hand-rolled kretek cigarette that was first manufactured in

1968 in Denpasar, Bali, by Aga Sampoerna, who represented the second generation
of the Sampoerna family. Combining high-quality tobacco and cloves, Sampoerna
Kretek has succeeded in producing the best hand-rolled kretek cigarette in its class.
Figure 47. Sampoerna Kretek

U Mild is a machine-made cigarette launched in 2005 as part of Sampoerna's LTLN

portfolio along with A Mild. U Mild has seen continued growth in sales volume since
its launching.
Figure 48. U Mild
Marlboro, one of the biggest international brands in the market, was launched in
1984 in Indonesia by PMID and is distributed by Sampoerna. Marlboro currently
has five variants, namely Marlboro Red, Marlboro Lights, Marlboro Black Menthol,
Marlboro Lights Menthol, and Marlboro Ice Blast.
Figure 49. Marlboro products

Figure 50. HMSP’s corporate structure
Source: Company data, Mirae Asset Sekuritas Indonesia research
As of 2016, HMSP operates 7 manufacturing facilities in Indonesia:
• Hand-Rolled Kretek Cigarette (SKT) production facilities: 3 in Surabaya

and 1 each in Malang and Probolinggo.
• Machine-Made Kretek Cigarette (SKM) production facilities: 1 each in

Pasuruan and Karawang.
HMSP has successfully retained its leading position in 2016. The company, however,
continued to witness stronger competition from the second player, a local company
named Gudang Garam (GGRM). Although HMSP keeps launching several new
product variants, the company has continued to focus on the performance of its
machine-rolled kretek (SKM) brands. The company presented a considerable threat
to some other leading players through its established distribution network and
solid tie-ups with various retail vendors around the Indonesian archipelago.

Management team
Board of Directors
President Director: Mindaugas Trumpaitis
He is a Lithuanian citizen, born in Lithuania on May 29, 1975. He was appointed

Sampoerna’s President Director at the Extraordinary General Meeting of
Shareholders (EGMS) of the Company held on November 18, 2016. Mindaugas
Trumpaitis joined PMI Lithuania in 1998 as a Merchandiser. Over the ensuing 18
years, he garnered progressive experience in managing tobacco businesses in
medium and large markets within PMI’s global affiliates, including 10 years of
experience as a General Manager/Managing Director in Finland, the Baltics, Mexico
and Canada. He holds a Bachelor Degree in Economics and a Master’s Degree in
Business Management from Klaipeda University in Klaipeda, Lithuania, and an
Executive MBA Courses from INSEAD in France.
Director: Mimi Kurniawan
She is an Indonesian citizen, born in Palembang on August 12, 1973. Mimi

Kurniawan was appointed Sampoerna’s Director of Human Resources at the Annual
General Meeting of Shareholders (AGMS) of the Company held on April 27, 2016.
She first joined Sampoerna in 1996 as a Project Officer and then progressed
through a number of positions in Sampoerna until her appointment as a Director in
2016. She received a Bachelor Degree in Industrial Engineering from Universitas
Kristen Petra in 1996.
Director: Andre Dahan
He is a Lebanese citizen, born in Beirut on July 10, 1969. Andre Dahan has served as
a Sampoerna’s Director since April 18, 2013. He joined Philip Morris Switzerland in
2003, progressing through several key positions in marketing at PMI affiliates in
Poland, Hungary, the Czech Republic and Russia, as well as building 16 years of
experience in the industry. He earned his Master’s Degree in Business
Administration from Institut d’Etudes Politiques de Paris, Paris, France, and his
Bachelor of Arts Degree in International Economics from L’université Paris-
Sorbonne, Paris, France. He was reappointed Sampoerna’s Director of Marketing at
the AGMS on April 27, 2015.
Director: Michael Scharor
He is an Austrian citizen, born in Austria on September 20, 1966. Michael Scharer

was appointed Sampoerna’s Director of Operations at the EGMS of the Company
held on November 18, 2016. He has 24 years of experience in tobacco industry
operations, including 19 years of experience within numerous PMI global affiliates
beginning in 1997. He holds a Master’s Degree in Mechanical Engineering and
Business Management from the Technical University of Vienna.
Director: Troy J.Modlin
He is a U. S. citizen, born in Colorado on October 19, 1971. Troy J. Modlin has served
as a Sampoerna’s Director of Corporate Affairs, appointed at the EGMS, since
September 18, 2015. He joined PMI in 2005 in Switzerland as a Manager and was
later appointed Director of Government Affairs before assuming the Director of
Corporate Affairs position in Hong Kong and Bangkok. He has 10 years of
experience in the industry. He earned his Bachelor of Science Degree in Business
Administration from the University of Colorado in Boulder, Denver, USA, and a
Master’s Degree in International Management from the University of Denver,
Daniels College of Business, USA.

Director: Michael Sandrittor
He is a German citizen, born in Heidelberg on May 12, 1968. Michael Sandritter has
served as a Sampoerna’s Director since May 9, 2014. He joined PMI in 1994 and
assumed several key roles in Finance at PMI’s Operations Center in Lausanne,
Switzerland, and at PMI’s affiliates in Hungary and Germany. He was reappointed
Director of Finance at the AGMS held on April 27, 2015. He holds a Diploma in
Business Administration from the University of Cooperative Education, Mannheim,
Germany.
Director: Yos Adiguna Ginting
He is an Indonesian citizen, born in Cilacap on January 19, 1969. Yos Adiguna

Ginting has served as a Sampoerna’s Director since June 2003. He joined
Sampoerna in 2002 as an Organization Development Specialist, after which he
progressed through several key positions at Sampoerna and other PMI affiliates,
gaining 14 years of experience in the industry. He was reappointed Director at the
AGMS on April 27, 2015 and lastly appointed Independent Director at the AGMS on
April 27, 2016. He earned a Bachelor of Science Degree in Chemistry and a Doctor
of Philosophy Degree in Theoretical Chemistry from the University of Tasmania,
Australia.
Director: The Ivan Cahyadi
He is an Indonesian citizen, born in Semarang on June 29, 1974. The Ivan Cahyadi
was appointed Sampoerna’s Director of Sales at the AGMS of the Company held on
April 27, 2016. He joined Sampoerna in 1996 as a Sales Trainee. Over his 20 years of
experience with the Company, he has progressed through a number of positions in
Sampoerna and PMI’s affiliates in Malaysia. He received a Bachelor Degree in
Economics from Universitas Surabaya in 1996.

Board of Commissioners
President Commissioner: John Gledhill
He is an Australian citizen, born in Liverpool on January 18, 1954. John Gledhill has
served as Sampoerna’s President Commissioner since July 18, 2012. He joined PMI
in 1983 and progressed through various senior roles in sales, marketing, and
general management at a number of PMI affiliates, including serving as President
Director of Sampoerna during the period of 2009-2012. John Gledhill was
reappointed Sampoerna’s President Commissioner at the AGMS held on April 27,
2015. He holds a Higher National Certificate in Business Studies from Liverpool
Polytechnic and completed the International Executive Program INSEAD, France, in
1999.
Vice President Commissioner: Wayan M. Tantra
He is an Indonesian citizen, born in Singaraja on July 2, 1962. Wayan Mertasana

Tantra has served as a Director at Sampoerna since May 27, 2008, and was
subsequently appointed Independent Director on May 9, 2014. At the AGMS held
on April 27, 2016, Wayan Mertasana Tantra was appointed Vice President
Commissioner of Sampoerna, replacing Charles Herve Bendotti. He has been with
Sampoerna for more than 28 years, beginning his career in the industry at one of
Sampoerna’s affiliates as a Sales Supervisor and subsequently assuming several key
positions. He holds a Bachelor Degree in Economics from the University of
Surabaya and a Master’s Degree in Management from Universitas Airlangga,
Surabaya.
Commissioner: Niken Rachmad
She is an Indonesian citizen, born in Malang on February 25, 1950. Niken Kristiawan
Rachmad has served as Sampoerna’s Commissioner since January 1, 2011. She
joined Sampoerna in 1998 as the Head of Corporate Communications and later
assumed the positions of Communications Director and Corporate Affairs Advisor.
She was reappointed Sampoerna’s Commissioner at the AGMS held on April 27,
2015. She earned a Bachelor of Science Degree from Universitas Gadjah Mada,
Yogjakarta.
Independent Commissioner: Goh Kok Ho
He is a Malaysian citizen, born in Selangor on July 3, 1946. Goh Kok Ho has served
as an Independent Commissioner since April 27, 2012, formerly holding several key
positions at PMI affiliates until 2001. He was reappointed Independent
Commissioner at the AGMS held on April 27, 2015. He obtained his Bachelor of Arts
Degree in Economics from the University of Malaya.

Competitive advantage
Solid balance sheet- small debt and manageable capex going forward
Since 2015 (the year when the company did a rights issue to comply with the free
float requirement), HMSP’s debt has been very small as the company boosted up its
cash ever since the rights issue. In addition, although the company has greater
financial stability, the company requires only minimal capex ahead as their current
capacity can fulfill market demand on cigarettes. The company only needs capex of
c.IDR1.1-IDR1.2tr per year for repair and maintenance. Thus, we believe HMSP will
have a positive free cash flow going forward, given our assumption that its capital
expenditure as percentage of sales will just be stable. To note, in 2015, the
company paid all their excise tax payable and charged it as an expense in the profit
and loss statement, turning its free cash flow to a minus state.
Figure 51. Gross gearing Figure 52. Net gearing
25% 25%
20%
20% 15%
10%
15% 5%
0%
10% -5%
-10%
5% -15%
-20%
0% -25%
2011 2012 2013 2014 2015 2016 2017F 2018F 2019F 2011 2012 2013 2014 2015 2016 2017F 2018F 2019F
Figure 53. HMSP’s stable capex as % of sales to boost free cash flow
IDRbn Cash (L) Free cash flow (L) Capex as % of sales (R)
20,000 2.5%
15,000 2.0%
10,000 1.5%
5,000 1.0%
- 0.5%
(5,000) 0.0%
2011 2012 2013 2014 2015 2016 2017 F 2018 F 2019 F

High interest income yielded from its high cash

We believe the current cash level has enabled HMSP to benefit from a high interest
income as of 2016 which yielded more than 40% of its average past four year cash
level (2013-2016). HMSP’s interest income in 2016 is even higher than its cash prior
to its rights issuance back in 2012-2014. We expect to see a lesser interest as
percentage of cash in 2017F and 2018F yet expect the interest income to grow next
year by 48% YoY as we estimate a higher cash balance, due to better topline and
muted capex rate. Thus, our estimate for HMSP bottom line margin is slightly
higher for 2018F by 40bps at 13.4% compared to 2017F.
Figure 54. Interest income
(IDRbn) Interest income (L) Interest as % of average cash (R)

1,000 50%
900 45%
800 40%
700 35%
600 30%
500 25%
400 20%
300 15%
200 10%
100 5%
0 0%
2011 2012 2013 2014 2015 2016 2017 F 2018 F

Diversified products to cater to all segments of target market

We believe Indonesia’s cigarette industry growth is driven by the country’s strong
smoking culture among the society, albeit several restrictions which are imposed
on the sector. In addition, cigarettes’ low prices, mounting disposable income, as
well as innovative products launched by cigarette-producing companies keep up
the development of the industry. In our view, HMSP’s market dominance benefits
the company, owing to its size and dawning brand recognition. Currently, HMSP is
the market leader with some of its leading brands, such as Sampoerna A and Dji
Sam Soe. We also believe that HMSP’s wide range of products, from the cheapest to
the most premium, is expedient for the company as it caters to all target markets in
the industry.
Currently, HMSP sells machine-rolled mild cigarettes (SKM mild) with three market
segments, such as A mild for the premium market, U mild for the middle market,
and Magnum Mild for the mid- to low-end market. Meanwhile, for the machine-
rolled full flavor (SKM FF), HMSP has three market segments, such as Dji Sam Soe
Magnum Filter 12 for the premium market, Marlboro Filter Black for the middle
market and U Bold for the mid- to low-end market. In addition, HMSP also
distributes white cigarettes under different brands, such as Marlboro Red,
Marlboro Ice Blast, Marlboro Lights, Marlboro Black Menthol, and Marlboro Lights
Menthol. Since the company only acts as a distributor for the white cigarettes, the
profitability of Marlboro in HMSP is lower than PMI US.
Figure 55. SKM Mild & SKM FF
SKM Mild SKM FF
A Mild
Retail price = IDR21,290 Marlboro Filter Black
Retail price = IDR21,500
Magnum Filter
Retail price = IDR16400
U Mild
Magnum Mild
U Bold
Source: Internet, Mirae Asset Sekuritas Indonesia Research

Table 12. GGRM vs HMSP retail price per pack (IDR)

GGRM HMSP
Hand-rolled Hand-rolled
GG Merah 12,490 Dji Sam Soe 17,200
Djaja - Sampoerna Kretek 12,900
Sriwedani -
Klobot -
GG Deluxe
Machine rolled- Full flavored Machine rolled- Full flavored

GG Surya (16) 21,000 U Bold 12,600
GG Filter International (12) 16,500 Marlboro Filter Black 21,500
GG Signature (12) 14,500 Dji Sam Soe Magnum Filter 16,400
GG Signature (16) 15,750
Surya Exclusive (16) 23,500
Machine rolled- Mid tar Machine rolled- Mid tar

Surya Professional (16) 16,200 Dji Sam Soe Magnum Mild (16) 13,083
Machine rolled- LTLN Machine rolled- LTLN

GG Mild (16) 17,500 A Mild (16) 21,290
Surya Pro Mild (16) 16,500 A Mild (12) 14,900
GG Signature Mild 16,800 U Mild 16,767
Avolution (20) 25,900
White cigarettes
Marlboro Red 25,700
Marlboro Ice Blast 27,600
Marlboro Lights 26,500
Marlboro Black Menthol 25,500
Marlboro Lights Menthol 23,190

Continuously innovating new products

Given the growing competition in cigarette market, HMSP continuously develops
new brands to strengthen its position in the market. In particular, the company has
been innovating its brand portfolio in the SKM Mild, SKM mid-tar, and SKM full
flavor. Therefore, despite its declining market share, the company is still a major
player in the cigarette market.
Figure 56. HMSP as the market leader in the industry Figure 57. HMSP’s overall market share
HMSP GGRM 37% 37%

Djarum RMBA
36%
Others
20.4
35%
33.1
34%
6.7 33.1%
33%
32%
18.6
31%
21.2
30%
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
2Q15
3Q15
4Q15
1Q16
2Q16
3Q16
4Q16
1Q17
2Q17
3Q17
Source: Nielsen, Mirae Asset Sekuritas Indonesia Research Source: PMI US, Mirae Asset Sekuritas Indonesia research
Firstly, although HMSP is the pioneer in the SKM mild segment (SKM LTLN), the
competition within the segment is getting tougher, given the emergence of
products from competitors. HMSP launched their first SKM mild in 1989 with the
brand Sampoerna A. Meanwhile, GGRM has just started producing their SKM mild
in 2002. We believe the recent decline in the HMSP’s SKM Mild (LTLN) market share
is due to the competition that comes from cheaper products in the market,
especially brands under GGRM Surya Pro Mild which are priced at below that of
HMSP’s A Mild. As we believe, in order for HMSP to be able to survive in the market,
the company has been introducing new SKM mild brands into the market. For
instance, HMSP launched Avolution 20 (SKM Mild) at the end of 2015.
Nonetheless, we view that HMSP’s SKM mild segment is recently losing consumers’
appetite as full flavor or mid-tar segment has gained their attention. HMSP’s A Mild
and U Mild have recently seen declining audience shares, which we believe is due to
consumers’ growing appetite for mid-tar cigarette segment that has a similar
pricing (c.IDR21,000/pack), such as GG Surya and Djarum Super.

Figure 58. HMSP’s mild cigarette Figure 59. HMSP’s mild cigarette (newer brand)
Source: Internet, Mirae Asset Sekuritas Indonesia research Source: Internet, Mirae Asset Sekuritas Indonesia research
Secondly, we believe the company is also aware of the emergence of SKM mid-tar
segments which have gained consumers’ attention recently, especially from
GGRM’s Surya Professional. Thus, HMSP also rebranded their Magnum Blue brand
into Magnum Mild. Magnum Blue, initially launched in 2014, did not sell as good as
Magnum Filter, which is more towards the SKM FF segment. Magnum Mild was
rebranded in the middle of this year, priced at around IDR12,500-IDR13,000 in the
supermarkets, much lower than Surya Pro’s price per pack. In addition, the
company’s Dji Sam Soe portfolio products are seen to be declining; thus, we believe
the company aims to strengthen their portfolio by rebranding their Magnum Blue
to Dji Sam Soe Magnum Mild with hopes to regain market share. At the current
price, Magnum Mild is now catering to the needs of mid- to lower-income smokers
compared to previously when it was targeted at middle- to upper-income smokers.
Our ground checks confirmed that consumers feel the current price is reasonable
compared to Magnum Blue. Nonetheless, Dji Sam Soe Magnum Mild is priced at
c.25% below the government’s suggested price. Therefore, according to the latest
PMK regulation, HMSP needs to raise its Magnum Mild price as the government
now only allows 15% of maximum discount from the minimum retail price (HJE)
which may impede consumers’ preference as the pricing will be similar to U Mild
which has experienced a declining sales volume, in our view. According to HMSP,
the company needs to raise its Magnum Mild price by March 2018F.
Figure 60. HMSP’s SKM Mid tar Figure 61. HMSP’s SKM FF
Source: Internet, Mirae Asset Sekuritas Indonesia research Source: Internet, Mirae Asset Sekuritas Indonesia research

Thirdly, we believe HMSP is also aware of the fact that SKM FF has always been the
favorite among Indonesian smokers. Therefore, the company launched a new SKM
full-flavored segment in February 2015, such as U Bold. According to the company,
only one year after the launch of U Bold, distribution was expanded to reach 55
cities across the country and has managed to improve its market share after
several months of launching the products. HMSP’s U Bold is priced at 30% of
discount from GGRM’s GG Surya, which is also SKM Mild.
Furthermore, in September 2016, the company has introduced another SKM FF

brand, which is Marlboro Filter Black 20. The brand was launched in 25 cities across
Indonesia. HMSP stated that they are going to sell Marlboro Filter Black nationwide
by the end of the year. We believe the company has strengthened its presence in
the SKM Full-flavor segment and has been successful in selling their U Bold and
Marlboro Filter Black recently. According to data from PMI US, HMSP was able to
increase their SKM FF market share by gaining 130bps market share to 3.6% in the
beginning of the year. In addition, HMSP was able to gain its market share in
Marlboro segment which is supported mainly from the continued share growth of
Marlboro Filter Black. Nonetheless, we are concerned about the company’s margin
due to higher contribution from products with lower margins (U Bold and Marlboro
Filter Black).

3Q17 Performance review

Slightly improving market share on a quarterly basis
In the 3Q17, HMSP has been able to sell 26.2bn sticks of cigarettes which grew by
4% YoY. Meanwhile, the industry is estimated to have grown by 6.5% YoY in the
3Q17. We believe HMSP’s third quarter higher volume growth was mainly driven by
Eid Al-Fitr seasonal effect. Therefore, HMSP 3Q17’s sales volume was higher than
2Q17 and 3Q16 (both were in the high season of Eid Al-Fitr). In the 3Q, HMSP’s
overall market share slightly improved on a quarterly basis to 33.1% from 32.8% in
2Q17.
We believe HMSP’s overall machine-made cigarettes sales volume saw an

improvement both on quarterly and yearly basis, mainly due to its SKM FF.
However, HMSP’s flagship brands, Sampoerna A and Sampoerna U (SKM Mild),
which we believe have higher margins compared to their latest launched products,
remained under pressure during the quarter as they booked lower market shares.
According to the conference call held in the beginning of November, U Mild sales
volume dropped by 24%YoY in 3Q17.
Figure 62. HMSP’s quarterly volume sales Figure 63. HMSP’s quarterly volume sales by segment
bn sticks (bn sticks) SPM SKT SKM

40 40
35 33
35
30
26 26 26 30
25 25
25
25 2.7
3.5
20 5.3
20 4.8
4.7
15
15
10
10
16.7 17.0 18.3
5
5
0
-
1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
Source: PMI US, Mirae Asset Sekuritas Indonesia research Source: PMI US, Mirae Asset Sekuritas Indonesia research
Figure 64. Sampoerna A’s market share Figure 65. Sampoerna U’s market share
15.5% 6.0%
15.0% 5.5%
14.5% 5.0%
14.0% 4.5%
4.4%
13.5% 4.0% 4.2%
13.0% 3.5%
12.5% 3.0%
1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17 1Q13 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17

Growth from cheaper products

In 3Q17, HMSP recorded higher “Dji Sam Soe” market share, which is particularly
attributed to its cheaper brand, Magnum Mild (SKM Mid tar). As of 3Q17, Magnum
Mild contribution to total HMSP sales volume was c.6-7%. In addition, HMSP also
saw a rising cigarette market share in Marlboro Filter Black (SKM FF) in 3Q17. We
believe that the selling of Magnum Mild and Marlboro Filter Black at lower prices
has caused HMSP’s 3Q17 gross margin to deteriorate to 24.1% compared to last
year’s (24.5%), as the product’s price per stick is much lower compared to the prices
of similar full flavor cigarette products in the market (GG Surya, GG International
and Djarum Super). HMSP stated that they are going to sell Marlboro Filter Black
nationwide by the end of the year.
Table 13. Price comparison

Company Brand Price/pack (IDR) Price / stick (IDR/Stick)
HMSP Marlboro Filter Black (20) 21,500 1,075
GGRM GG Surya (16) 21,000 1,312
GGRM GG International (12) 16,500 1,375
Djarum Djarum Super (16) 21,250 1,328
Source: Mirae Asset Sekuritas Indonesia research
Figure 66. Dji Sam Soe’s market share Figure 67. HMSP’s market share from other brand segments
8.5% 10.0%
8%
8.0% 9.5%
7.5% 9.0%
7.0% 8.5%
6.5% 8.0%
8%
6.0% 7.5%
5.5% 7.0%
2Q14 4Q14 2Q15 4Q15 2Q16 4Q16 2Q17 1Q14 3Q14 1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
Figure 68. HMSP’s overall market share Figure 69. Sales volume contribution to revenue (%)
37% White Hand-rolled Machine-made

100%
36% 14% 12% 10%
90%
35% 80% 19% 20%

19%
70%
34%
60%
33% 50%
40%
32%
67% 68% 70%
30%
31%
20%
30% 10%
0%
1Q15 3Q15 1Q16 3Q16 1Q17 3Q17
Source: PMI US, Mirae Asset Sekuritas Indonesia research Source: Company data, PMI US, Mirae Asset Sekuritas Indonesia research

Table 14. Cigarette industry and HMSP volume (bn sticks)

Item 3Q16 2Q17 3Q17 QoQ YoY 9M16 9M17 YoY
Volume
Total cigarette industry 72.3 75.7 79.2 5% 10% 233.1 225.9 -3.1%
Total HMSP 25.1 24.8 26.2 6% 5% 79.2 74.4 -6.1%
HMSP market share 34.7% 32.8% 33.1%
HMSP volume by brands
Sampoerna A Mild 10.4 10.6 10.5 -1% 0% 33.3 30.9 -7.1%
U Mild 3.1 3.6 3.3 -7% 7% 10.1 10.4 3.2%
Dji sam soe 4.8 4.8 6.4 32% 34% 15.4 15.7 2.4%
Marlboro 3.5 3.1 2.7 -13% -24% 11.6 8.7 -25.0%
Others 3.3 2.8 3.4 21% 2% 8.3 8.7 5.1%
HMSP volume by segment
SKM 16.8 17.0 18.3 7% 9% 52.0 50.7 -2.5%
SKT 4.8 4.8 5.3 11% 11% 16.3 15.0 -7.9%
SPM 3.5 3.1 2.7 -13% -24% 11.6 8.7 -25.0%
Source: PMI US, Mirae Asset Sekuritas Indonesia research
Table 15. HMSP’s market share and Industry breakdown

Item 3Q16 2Q17 3Q17 QoQ YoY
(%p) (%p)
PMI market share
Sampoerna A 14.4% 14.0% 13.2% -0.80 -1.20
U Mild 4.3% 4.7% 4.2% -0.50 -0.10
Dji sam soe 6.6% 6.4% 8.1% 1.70 1.50
PMI market share
SKM 30.2% 29.1% 29.7% 0.60 -0.50
SKT 38.6% 36.2% 38.4% 2.20 -0.20
SPM 79.7% 73.4% 67.3% -6.10 -12.40
Overall HMSP Market share 34.7% 32.8% 33.1% 0.33 -1.55
Cigarette industry breakdown
SKM 76.7% 77.1% 77.6% 0.50 0.90
SKT 17.2% 17.4% 17.4% - 0.20
SPM 6.1% 5.5% 5.0% -0.50 -1.10
Source: PMI US, Mirae Asset Sekuritas Indonesia research

Financial Forecast
Revenue growth mainly supported by higher ASPs
We forecast HMSP’s revenue to grow by 5% and 8% YoY in 2017F and 2018F
respectively. Our revenue forecast is basically supported by higher average selling
price (ASP) assumption to offset the higher excise tax per segment. As to our
volume assumptions, however, we forecast lower volume for white cigarettes at 8%
and 6% YoY in 2017F and 2018F, mainly on the back of weaker preference among
Indonesian smokers. In addition, white cigarettes will see the highest increase in
excise tax per stick in 2018F, which is 12.6%. Indeed, HMSP’s 9M17 white cigarettes’
(SPM) volume has declined by 25% YoY. Meanwhile, for hand-rolled cigarettes (SKT)
segment, we forecast a decline by 3% for 2017F and 2018F along with the
downward trend of the company’s SKT sales revenue contribution to total revenue.
We expect HMSP’s SKT segment contribution to total revenue to slightly decline to
19% next year. On the other hand, we still believe in SKM segment as SKM FF and
mid tar products are now favored by smokers. We project a slightly higher volume
of SKM segment by 1% for 2018F, as we also expect the consumption to slightly
recover next year. In addition to that, we believe SKM FF and mid tar segments
have a better chance to increase their ASP next year, especially for Magnum Filter
Black as it is gaining volume and still priced very low compared to its closest
counterparts.
Figure 70. Revenue forecast Figure 71. Gross margin
IDRbn
IDRbn Gross profit (L) Gross margin (R)
30,000 30%
120,000
29%
25,000
100,000 28%
27%
20,000
80,000
26%
60,000 15,000 25%

24%
40,000 10,000
23%
22%
20,000 5,000
21%
- 0 20%
2010 2011 2012 2013 2014 2015 2016 2017 F 2018 F 2010 2011 2012 2013 2014 2015 2016 2017 F 2018 F
Expect a soft gross profit growth and margin

We forecast HMSP’s gross margin to grow by 4% CAGR during 2016-2018F. We
believe the company is currently facing a structurally declining gross margin due to
its lower capacity to increase its higher margin products, especially A Mild, which is
much higher than GGRM’s Surya Pro Mild (16) and GG Mild (16). In addition, the
company also sells lower margin products which have recently gained smokers’
attention, such as Magnum Mild and Marlboro Filter Black. Magnum Mild’s which
was introduced in May 2017, was able to increase its market share to 2.2% in the
3Q17. We expect the company’s margin to experience a slight decline in 2017F and
2018F by 0.6%p and 0.2%p YoY, respectively.
On the other hand, we project a stable bottom line margin, mainly supported by
the company’s ability to book net interest income as the company has ample cash
reserves as well as a flat capital expenditure for the company going forward. Given
ample cash and minimal capex going forward, we expect the company’s payout
ratio to be stable at a high rate of 100% going forward.

Figure 72. Gross profit forecast Figure 73. Bottom line forecast
IDRbn
IDRbn Net profit Net profit margin
16,000 16%
30,000
14,000
15%
25,000 12,000
14%
20,000 10,000
8,000 13%
15,000
6,000
10,000 12%
4,000
5,000 11%
2,000
0 - 10%
2010 2011 2012 2013 2014 2015 2016 2017 F 2018 F 2010 2011 2012 2013 2014 2015 2016 2017 F2018 F
Figure 74. High dividend payout ratio
IDRbn Dividend (L) Payout ratio (R)
14,000 130%
12,000 120% 120%
10,000
110%
8,000 100%
100%
100% 100%
98%
6,000
90%
4,000
84%
2,000 80%
- 70%
2012 2013 2014 2015 2016 2017 F 2018 F

Valuations
We initiate our coverage on HMSP with a hold rating and a target price of
IDR4,310/share, which was derived by using a target multiple of 2018F of 36x.
We like HMSP on the back of its strong position in the cigarette market, despite its
recent declining market share. Nevertheless, its premium valuation, structurally
declining market share and tight competition in the market lead to our hold
recommendation on the company. HMSP’s flagship brands, Sampoerna A and
Sampoerna U (SKM Mild), which we believe have higher margins compared to their
latest launched products, remain under pressure in the 3Q17 as they booked lower
market shares. In addition, HMSP’s SKM FF brands (U Bold and Marlboro Filter
black) might deteriorate the company’s margins.
Currently, HMSP is trading at 34.3x forward PE, still lower than its average 5-year +1
standard deviation at 35.7x.
Figure 75. HMSP Forward P/E Band

(x)
40
+2 Std Dev
+1 Std Dev
35
Avg PER
30
-1 Std Dev
25 -2 Std Dev
20
01/13 01/14 01/15 01/16 01/17
Source: Bloomberg, Mirae Asset Sekuritas Indonesia Research

HM Sampoerna (HMSP IJ/ Hold/ TP: IDR4,310)
Table 16. Forecast and valuations

2015 2016 2017F 2018 F
Revenue (IDRbn) 89,069 95,467 100,203 107,906
EBITDA (IDRbn) 14,467 16,615 17,032 18,117
Net profit (IDRbn) 10,363 12,762 12,918 13,923
EPS (IDR/share) 89.1 109.7 111.1 119.7
DPS (IDR/share) 105.3 89.0 109.6 110.9
ROE (%) 32% 37% 38% 39%
Dividend yield (%) 3% 2% 3% 3%
P/E ratio (x) 46.0 37.4 36.9 34.3
P/BV ratio (x) 14.9 14.0 13.9 13.5
EV/EBITDA (x) 32.8 28.4 27.8 26.1
Table 17. Income statement projection

IDRbn 2015 2016 2017F 2018 F
Revenue 89,069 95,467 100,203 107,906
COGS -67,305 -71,612 -75,816 -81,877
Gross Profit 21,764 23,855 24,388 26,028
Opex -7,716 -7,834 -8,016 -8,632
Operating Profit 14,048 16,020 16,371 17,396
Other income/(expenses) -76 159 237 255
Interest income 99 854 635 933
Interest expense -138 -22 -23 -25
Profit before income tax 13,933 17,011 17,219 18,559
Income tax expenses -3,569 -4,249 -4,301 -4,636
Minority interest 0 0 0 0
Net profit 10,363 12,762 12,918 13,923
EBITDA 14,467 16,615 17,032 18,117

Table 18. Balance sheet projection

IDR bn 2015 2016 2017F 2018F
Cash and equivalents 1,719 5,056 3,352 4,390
Receivables 4,727 4,996 5,317 5,726
Inventories 19,072 19,442 19,043 18,377
Others 4,290 4,153 4,778 4,980
Total current assets 29,807 33,647 32,490 33,473
Fixed assets - net 6,281 6,895 7,508 7,973
Others 1,922 1,965 2,129 2,303
Total non-current assets 8,203 8,861 9,637 10,276
Total assets 38,011 42,508 42,127 43,749
ST bank loans and CM -
Accounts payables 3,191 3,871 3,518 3,799
Others current liabilities 1,348 2,558 2,690 2,891
Total current liabilities 4,539 6,428 6,207 6,690
Deferred tax liabilities - - - -
Others 1,456 1,905 1,575 1,696
Total non-current liabilities 1,456 1,905 1,575 1,696
Total liabilities 5,995 8,333 7,782 8,386
Minority interests - - - -
Shareholders' equity 32,016 34,175 34,345 35,363

Table 19. Cash flow statement projection

IDRbn 2015 2016 2017F 2018F
CF from operation
Net profit 10,363 12,762 12,918 13,923
Depreciation/amortization 419 595 660 721
Change in working capitals -13,621 1,336 -839 647
Others 136 417 -449 -104
CF from operation -2,703 15,110 12,291 15,188
CF from Investments
Net capex -781 -1,209 -1,273 -1,187
LT investments -182 19 -64 -60
CF from investments -963 -1,190 -1,337 -1,247
CF from financing activity
Increase/(decrease) in debt -2,835 0 91 0
Increase/(decrease) in equity 20,414 -19 0 0
Dividend payments -12,250 -10,352 -12,749 -12,905
Others -8 -212 -1 2
CF from financing activity 5,319 -10,583 -12,659 -12,903
Increase (Decrease) in Cash 1,654 3,337 -1,705 1,038
Beginning balance 65 1,719 5,056 3,352
Ending balance 1,719 5,056 3,352 4,390
Table 20. Key ratio

2015 2016 2017F 2018F
Growth (%)
Revenue 10% 7% 5% 8%
EBITDA 2% 15% 3% 6%
Net profit 2% 23% 1% 8%
Profitability (%)
Gross margin 24% 25% 24% 24%
Operating margin 16% 17% 16% 16%
EBITDA margin 16% 17% 17% 17%
Net margin 12% 13% 13% 13%
ROE 32% 37% 38% 39%
ROA 27% 30% 31% 32%
Leverage (X)
Current ratio 6.6 5.2 5.2 5.0
Quick ratio 2.4 2.2 2.2 2.3
Debt to equity 0.2 0.2 0.2 0.2
Net debt to equity 0.1 0.1 0.1 0.1
Interest coverage 101.5 717.6 698.7 689.4

Gudang Garam (GGRM)

Cheap yet powerful
Gudang Garam was initially founded by Surya Wonowidjojo in Kediri, East Java
in 1958. In 1979, the company’s first cigarette manufacturing machines were
installed. The company has been listed on IDX since 1990. GGRM produces a
(Initiate) Trading Buy wide range of kretek cigarettes, including low-tar-low-nicotine variants, widely
known as light and mild, as well as traditional hand-rolled kretek.
Target Price (12M, IDR) 91,000
Expect a double-digit topline growth for 2018F
Share Price (11/17/17, IDR) 77,975 We expect GGRM to book 10.5% YoY growth in its topline in 2018F, mainly on the
back of higher average selling price (ASP) of c.8%, which we believe should be
Expected Return 16.7% sufficient to offset higher excise tax and other raw material price increases in the
cost of goods sold. We forecast flattish volume growth for GGRM’s SKT segment
OP (18F, IDRbn) 12,292 and 1% volume growth for GGRM’s SKM segment as the company sees more
Consensus OP 18F, IDRbn) 12,218 potentials in the SKM full-flavor segment.
EPS Growth (18F, %) 14.8 Robust free cash flow, expect higher dividend per share
Market EPS Growth (17F, %) 16.6
P/E (18F, x) 17.8 We expect GGRM to book robust free cash flow going forward as the company sees
Market P/E (18F, x) 28.9 less capex burden compared to five years ago (2011-2015). In addition, given lesser
Market Cap (IDRbn) 154,744.8 capex going forward, we estimate a stable payout ratio at 75% (similar to 2017F),
Shares Outstanding (mn) 1,924.1 and expect higher dividend per share going forward.
Free Float (%) 23.8
Full-flavored cigarettes as the winner
Foreign Ownership (%) 81.4
Beta (12M) 1.2 As GGRM’s product mix is still dominated by machine-made (SKM) full-flavored
52-Week High 83,100 cigarettes, we believe the company is well positioned to embrace the growing
52-Week Low 60,025 machine-made full-flavored segment; its well-received brand image among
smokers should support its growth agenda. According to Nielsen, the industry’s
(%) 1M 6M 12M
machine-made (SKM) FF market share has grown from 28% in 2012 to 38% today.
Absolute 20.9 5.9 23.8
Indeed, GGRM saw an increase in its SKM FF volume contribution. In 2013, GGRM
Relative 19.2 -0.2 7.3
SKM FF products’ contribution to total volume was 74%. Currently, the figure has
(D-1yr=100) JCI GGRM
amplified to 77%.
125
Initiate with a Trading Buy call (TP: IDR 91,000/share)
115
We initiate our coverage on GGRM with a trading buy rating and a target price of
105
95
85 IDR91,000/share, which was derived using DCF with a 7-year life span. Our WACC
assumption of 9.5% is derived from the following assumptions: Risk free (Rf) rate of
11/16
12/16
1/17
1/17
2/17
3/17
3/17
4/17
5/17
5/17
6/17
7/17
7/17
8/17
9/17
10/17
10/17
11/17
6.5%, market risk premium (MRP) of 5%, terminal growth rate of 3%, and equity
beta of 0.9x. GGRM is currently trading near -1std deviation at 22x forward P/E, 13%
discount from HMSP which is trading at 19.5x. We are taken with GGRM as the
company is projected to register higher free cash flow, stable margins, and benefits
from higher selling price due to lesser competition in the market.
Item 2014 2015 2016 2017F 2018F

Revenue (IDRbn) 65,186 70,365 76,274 82,912 91,578
Gross Profit (IDRbn) 13,380 15,485 16,617 17,825 20,060
Operating Profit (IDRbn) 8,525 9,906 9,972 10,805 12,292
Net profit (IDRbn) 5,369 6,426 6,677 7,329 8,414
EPS (IDR) 2,790 3,340 3,470 3,809 4,373
BPS (IDR) 17,151 19,698 20,522 21,729 23,245
P/B (x) 4.5 4.0 3.8 3.6 3.4
P/E (x) 27.9 23.3 22.5 20.5 17.8
Note: All figures are based on consolidated FS

Gudang Garam
Company Background
Gudang Garam was initially founded by Surya Wonowidjojo in Kediri, East Java in
1958. In 1979, the company’s first cigarette manufacturing machines were installed.
The company has been listed on IDX since 1990.
GGRM produces a wide range of kretek cigarettes including low-tar-low-nicotine

(LTLN) variants, widely known as light and mild, as well as traditional hand-rolled
kretek. The company has apparently become the leading manufacturer of
Indonesian Kretek (clove cigarettes) and is well known for its signature machine-
rolled full-flavor cigarette brands, GG Surya and GG International. In addition to
that, the company’s new brand, Surya Professional, has been able to gain market
share due to its competitive pricing compared to similar brands in the industry.
Figure 76. GGRM’s product lines
According to Nielsen, GGRM is currently the second largest cigarette producer in

Indonesia after HMSP. The company mostly produces machine-made (SKM) full-
flavored cigarettes which contribute to around 77% of the company’s sales volume,
followed by machine-made (SKM) LTLN at 12%, and hand-rolled (SKT) cigarettes at
11% of total volume.

Figure 77. GGRM’s revenue breakdown Figure 78. GGRM’s sales volume breakdown
IDRbn Hand rolled kretek (SKT)

Machine made kretek (SKM)
Klobot (corn silk) clove cigarettes
90,000 Paperboard and others
12% 11% Hand rolled kretek
80,000
70,000
60,000
50,000 Machine made kretek
(Full flavored)
40,000
30,000
20,000
Machine made kretek
10,000 (Low tar & nicotine)
77%
-
2008 2010 2012 2014 2016 2018 F
Source: Company data, Mirae Asset Sekuritas Indonesia Research Source: Company data, Mirae Asset Sekuritas Indonesia Research
Figure 79. GGRM’s main products
Table 21. GGRM’s ex-factory price/pack (as of October 31, 2017)

Types of cigarettes Ex-factory price Ex-factory price Current Banderol price
(as of January 2017) (as of October 31,2017) Retail price
Hand-rolled
GG Merah IDR 10,250 IDR 10,900 IDR 12,490 IDR10,680
Machine-rolled (FF)
GG International (12) IDR 14,100 IDR 14,900 IDR 16,500 IDR 14,250
GG Surya (16) IDR 18,200 IDR 18,800 IDR 21,000 IDR 18,500
Machine-rolled (Mild)
Surya pro mild (16) IDR 12,000 IDR 13,400 IDR 16,500 IDR 17,925
GG Mild IDR 13,300 IDR 13,800 IDR 17,500 IDR 17,925

GGRM is currently operating two production facilities at two main sites, each having
its own primary and secondary kretek manufacturing operations. The first site is in
Kediri, where the company was founded (Gudang Garam headquarters). The
second site is located in Gempol, East Java (50 km away from Surabaya).
GGRM is also operating an in-house printing facility and five major operating
subsidiaries, such as:
• Surya Pamenang  producing paperboard for Gudang Garam packaging
• Surya Madistrindo  sole distributor of the company’s products
• Surya Air and Galaxy Prime Ltd  providing non-scheduled air transport
services
• Graha Surya Media  engaged in entertainment services
Table 22. GGRM directly-owned entities

Entity's name Commenced commercial operations Principal activities
PT Surya Pamenang 1993 Paper industry
PT Surya Madistrindo 2004 Trading
PT Surya Air 2011 Non-scheduled air transport services
PT Graha Surya Media 2013 Tobacco processing industry
PT Surya Inti Tembakau not yet commenced its commercial operations Tobacco processing industry
PT Surya Abadi Semesta not yet commenced its commercial operations Electrical cigarettes industry
Galaxy Prime Ltd 2015 Non-scheduled air transport services
Surya Dhoho Investama not yet commenced its commercial operations Investment

Management team
Board of Directors
President Director: Susilo Wonowidjojo
Mr Susilo Wonowidjojo was appointed President Director in June 2009. He was a

former Vice President Director since 1990 and previously a Director since 1976 with
responsibilities for procurement of raw materials, flavors, inventory, and
production management. He is related to Juni Setiawati Wonowidjojo (President
Commissioner) and is affiliated to the company’s shareholders. Concurrently, he is
serving as President Commissioner of PT Surya Madistrindo and Commissioner of
PT Surya Air and PT Surya Dhoho Investama. He is also the President Director of PT
Suryamitra Kusuma and Director of PT Suryaduta Investama, PT Suryaduta Mandiri,
and PT Surya Halim Karya Sejahtera.
Figure 80. GGRM’s president director
Director: Heru Budiman
Mr Heru Budiman was appointed Director in 2000. He joined the company in 1990
with responsibilities for Treasury and Investor Relations and was appointed
Corporate Secretary in 1996. His background includes senior management
positions at international and leading national banks. He holds a Bachelor Degree
in English from Satya Wacana University. He is currently a Commissioner of PT
Graha Surya Media and PT Surya Abadi Semesta. He is also serving as President
Director of PT Surya Madistrindo.
Director: Herry Susianto
He was appointed Director of Finance in 2007. His previous positions was an

Internal Audit Head from 2002 to 2007 and the Head of Accounting Division from
2001 to 2002. He joined the company in 1983 and was assigned to the accounting
division. He holds a Degree in Law from Airlangga University, Surabaya and a
Master’s Degree in Management from Gajayana University, Malang. Currently, he is
serving as a Commissioner of PT Surya Madistrindo, PT Surya Inti Tembakau, and
PT Bukit Dhoho Indah. He is also the President Director of PT Graha Surya Media
and Director of PT Surya Air and PT Surya Abadi Semesta.
Director: Buana Susilo
He was appointed Director of Manufacturing Technology in 2008. He draws upon

extensive experience with the company in equipment design, process planning,
and configuration. Previously, he served as Deputy Director of Technical Division
since 1991 and in early 2000 was in charge of the greenfield construction and
development of the second manufacturing facility at Gempol. He joined the
company in 1981 and was responsible for the modernization of primary processing.
He is also a Director of PT Surya Inti Tembakau.

Director: Istata Taswin Siddharta
He was appointed Director of in 2012, primarily responsible for Information

Technology. He joined the company in 2008 and served as Deputy Marketing
Director from 2008 to 2010. He also formerly served as a partner of KPMG
Indonesia and has got extensive experience as a public accountant for 20 years. He
holds a Bachelor Degree in Accounting from Universitas Indonesia, Jakarta. He is
concurrently serving as a Commissioner of PT Surya Pamenang, PT Surya Zig Zag
and all subsidiaries of PT Surya Madistrindo. He is also a Director of PT Surya
Madistrindo, PT Surya Dhoho Investama, and PT Grandsurya Resortindo, in
addition to being an Audit Committee member of PT Goodyear Indonesia Tbk.
Director: Lengga Nurullah
She was appointed Director in 2015 with responsibility for SKM production at Kediri.
She formerly served as Deputy Director of Production at Gempol in 2014-2015 and,
prior to this, was the Head of LTN (low tar nicotine) production in 2013-2014. She
joined the company in 2012, working in the Technical Division. Previously she
worked in automotive manufacturing at Bosch in Germany. She is a graduate from
the Technical University of Berlin. She is also serving as a Director of PT Bukit
Dhoho Indah.
Independent Director: Sony Sasono Rahmadi
He joined the company in 2012 and was appointed Director with responsibility for
printing operations of cigarette packaging. From 2008-2012, he served as Director
at PT Cipta Kretek Nusantara and PT Karyadibya Mahardhika. Prior to that, he
worked at PT Surya Zig Zag, during which he served as the General Manager and
Management Representative. He was appointed Independent Director in 2014. He
holds a Bachelor Degree in Chemical Engineering from Institut Teknologi Sepuluh
Nopember, Surabaya.
Figure 81. GGRM’s board of directors

Board of Commissioners
President Commissioner: Juni Setiawati Wonowidjojo
She was appointed President Commissioner of the company in June 2009. She has
been a Commissioner since 1983. She is related to Susilo Wonowidjojo, the
President Director and is affiliated to the company’s shareholders. Concurrently,
she is serving as President Commissioner of PT Suryamitra Kusuma as well as
Commissioner of PT Suryaduta Investama, PT Surya Wisata, and PT Taman
Sriwedari. She is also the President Director of PT Surya Pamenang and PT Surya
Zig Zag.
Figure 82. GGRM’s president commissioner
Commissioner: Lucas Mulia Suhardja

Dr Suhardja was appointed a commissioner of the company in June 2009. A general
practitioner by professional background, Dr Suhardja formerly served the company
as the Head of the Jakarta representative office from 1976 until 2009. He is a
graduate from the Medical School of Universitas Airlangga, Surabaya.
Independent Commissioner: Frank Willem van Gelder

Frank Willem van Gelder was appointed Independent Commissioner of the
company in March 2002. Currently, he is a Managing Partner of the consulting firm
New Frontier Solutions Pte. Ltd, Singapore and formerly served ABN AMRO Bank
for 12 years. He holds a Master’s Degree in Civil Law from Leiden University, the
Netherlands.
Independent Commissioner: Gotama Hengdratsonata

He was appointed Independent Commissioner of the company in June 2014. He has
been a Commissioner of PT Semesta Indovest Securities, Jakarta since 2000. He
formerly served Lippo Bank from 1985 to 2004, during which he served as Group
Head for East Indonesia. He graduated as a Civil Engineer from Feng Chia
University, Taiwan.
Figure 83. GGRM’s board of commissioners

Competitive advantage
Stable dividend payout ratio and debt
GGRM has been maintaining average payout ratio of c.36% over the past 10 years.
The company had spent c.IDR18.4tr for capex throughout 2011-2015 to replace
machineries, build new production machinery, refurbish factories as well as
establishing modern warehouses, which clearly explains why its dividend payout
ratio was very low during those years (c.35%). Going forward, we believe GGRM will
maintain its capex low as the current plants’ capacities are able to cater to demands
from consumers.
Last year, GGRM increased its payout ratio to 78%, with dividend per share
increasing by 225% on a YoY basis from IDR800/share to IDR2,600/share in 2016.
The company confirmed that this year, they will spend the same amount of
dividend per share at IDR2,600, which translates into 75% of dividend payout ratio.
Although GGRM’s recent plan of land acquisition worth IDR850bn with a total area
of 2.68m² to construct an airport in Kediri is a key concern to the capex going
forward, we judge the amount to be insignificant. Hence, we believe the company
will still be able to maintain its low capex over the years ahead. Furthermore, even
if the company were to proceed with the airport construction (which we assume to
be at c.IDR1.5tr-IDR2tr), we expect the total lost to be spread across a span of 3-4
years. All in all the financial burden is estimated at IDRIDR400bn-IDR700bn/ year,
which would still be low at c.2% of sales compared to the previous years’ 6.3% of
sales (assuming GGRM does not spend hefty capex on production capacity plant in
the next several years).
Figure 84. GGRM’s capex and capex rate as % of revenue
IDRbn Capex Capex rate (%)
6,000 12%
5,000 10%
4,000 8%
3,000 6%
2,000 4%
1,000 2%
- 0%
2011 2012 2013 2014 2015 2016 2017 F 2018 F 2019 F 2020 F
Since GGRM no longer spends hefty amount of capex going forward and is still
going to maintain its bank borrowing amount, (maintaining good relationships with
the banks), we assume the company will still be able to maintain stable dividend
payout ratio at the current rate going forward. With the current low interest rate in
the market, we favor the company’s initiative of using debt to finance their
expansion as it will generally be cheaper than the cost of equity. Based on our
calculation, any increase of 25%p in GGRM’s payout ratio should also increase the
company’s return on equity (ROE) by 100bps.

Figure 85. GGRM’s dividend per share and payout ratio Figure 86. GGRM’s gearing and net gearing
(IDR/share) Dividend per share Dividend Payout ratio Gross Gearing Net Gearing
3,000 90%
60%
78% 75% 80%
50% 51% 51%
2,500
70% 50%
2,000 60%
40%
50%
1,500
40% 30%
1,000 30%
20%
20%
500
10% 10%
- 0%
2009 2010 2011 2012 2013 2014 2015 2016 2017 F2018 F 0%
2011 2012 2013 2014 2015 2016 2017 F 2018 F
Full-flavored cigarettes as the winner
GGRM mostly produces machine-made (SKM) full-flavored cigarettes which

contribute to around 77% of the company’s sales volume. In 2013, GGRM’s sales
volume declined after rebranding the overall packaging design of its machine-
made full-flavored (SKM FF), GG Filter International Merah (GG International), as
well as hand-rolled (SKT) products, namely GG Djaja and GG Merah. The company
turned to a rebranding strategy in order to gain fresher and younger profile of
smokers, most of whom fall in their mid-age (30+ years old). Nonetheless, many
smokers who found different taste in the new GG International were disappointed
and switched to other brands, causing weak sales volume of GG International in
2013. Nevertheless, since GG International is priced lower than GG Surya 16, which
is also GGRM’s SKM FF products, and has a more intensive flavor compared to GG
Surya, this brand’s products were able to regain high volume in 2014 onwards.
In fact, as GGRM’s product mix is still dominated by machine-made (SKM) full-

flavored cigarettes, with GG International being the second largest product
portfolio after GG Surya, we believe the company is well positioned in the growing
machine-made full-flavored segment due to its well-received brand image among
smokers. According to Nielsen, the industry’s machine-made (SKM) full-flavored
market share has grown from only 28% in 2012 to 38% today. Indeed, GGRM saw
an increase in its SKM FF volume contribution. In 2013, GGRM machine-made (SKM)
full-flavored products’ contribution to total volume was 74%. Currently, the figure
has amplified to 77%.
In addition to that, we have regard for the company’s diversification into a premium
price cigarette in the SKM FF. GGRM’s first premium product, launched in 2013
under the brand GG Surya Exclusive, invited good market responses. We expect
warm reception from the market to continue and GGRM to enhance its market
share in SKM FF.

The favorable mid-tar type of cigarette
According to our discussion with the company’s investor relation team, GGRM’s
SKM mid-tar segment, Surya Professional (Surya Pro), has been recording higher
sales volume growth due to its ability to sell at a cheaper price compared to other
cigarettes in the similar type in the industry, such as LA Bold and Dunhill Kretek
Filter (SKM mid-tar).
Surya Pro, commonly referred to as Surya PROfessional, is the first innovation

produced by the company, launched in the 1990s. Initially, the products did not sell
good in the market. However, GGRM has started advertising this new cigarette type
within the year of 2016-2017 in order to increase the sales of Surya Pro itself. Surya
Pro essentially offers a strong sensation of full-flavored cigarettes but with an
innovation of having a smaller diameter of cigarette stick and containing slightly
lower tar than that of FF (mid-tar). We believe this reflects the spirit of the company
to always innovate in order to increase their sales volume. Our ground check on
smokers reveals that Surya Pro seems to be the right answer for people who want a
distinctive sensation from full-flavored cigarettes but with an acceptable size of
stick among younger consumers, especially those aged 18-30 years old who feel
reluctant to try the FF type of cigarette due to its “old” image. Surya Pro has started
to re-launch its product in November 2016 with a slogan of "Never Quit", reflecting
youth spirit to allure younger smokers.
Compared to LA Bold and Dunhill Kretek Filter, both of which are in the mid-tar
segment (tar level of 18-25mg), Surya Pro is priced at a more competitive price.
Based on our channel check, Surya Professional red is priced at IDR16,200, while
Dunhill Kretek Filter and LA Bold are priced at IDR17,900 and IDR20,600,
respectively.
Table 23. Price comparison

Company Machine-rolled Mild Price per pack Price per stick
GGRM Surya Pro (16) 16,200 1,013
Djarum LA Bold (20) 20,600 1,030
BAT Dunhill Kretek Filter (16) 17,900 1,119
Figure 87. Machine rolled (SKM) mid-tar segment
Source: Internet, Company data, Mirae Asset Sekuritas Indonesia Research

A relatively cheaper valuation compared to its closest counterpart
GGRM is currently trading at 17.8x 2018F P/E, at relatively much cheaper compared
to its counterpart, HMSP, which is trading at 34.3x 2018F P/E. We believe the
company’s discounted valuation as compared to HMSP is merely due to its less
visible capex. The company has not disclosed its plan for expansion in the near
term as it is yet to plan for the launching of new products. However, their plan to
construct an airport in Kediri, as well as expanding to air transportation business
under Surya Air label (GGRM has established a 100% owned subsidiary, PT Surya
Air), remains a key concern for investors.
Nevertheless, we believe that should GGRM spend a high capex in the future, it will
translate into a strong revenue generation. As evident, the company was successful
in selling and promoting GG Mild products (launched in April 2013). Meanwhile, we
believe GGRM valuation is currently very attractive given the expectation of strong
full flavor sales volume, as well as less competition in the cigarettes industry post
recent regulation on PMK that specifies minimum cigarette retail selling prices at
the maximum discount of 15% from government’s suggested retail price (HJE). We
view this as an advantage for big players, including GGRM, as we believe its market
share will be maintained going forward.
Figure 88. GGRM vs HMSP P/E
(x) GGRM
HMSP
45
40
35
30
25
20
15
10
-
1/4/2013 1/4/2014 1/4/2015 1/4/2016 1/4/2017

Financial forecast
Expect double-digit topline growth for 2018F
We expect GGRM to book 10.5% YoY topline growth in 2018F, chiefly on the back of
higher average selling price (ASP) of c.8% to offset the higher excise tax and other
raw material price increases in the cost of goods sold. We forecast flattish volume
growth for GGRM’s SKT segment and 1% volume growth for GGRM’s SKM segment
as the company sees more potentials in the SKM full-flavor segment. As full-
flavored segment has a lower tobacco cost compared to SKT, we expect the
segment will stabilize GGRM’s gross margin going forward. GGRM has higher
inventory compared to HMSP in order to secure a large amount of tobacco (due to
ageing process) and cloves (due to fluctuating prices). Thus, we believe the
company is able to overcome fluctuating raw material prices.
Figure 89. Revenue forecast Figure 90. Stable gross margin forecast
IDRbn Revenue growth IDRbn Gross profit (L) Gross profit margin (R)
100,000 20%
25,000 23%
90,000 18%
80,000 16% 22%

20,000
70,000 14%
21%
60,000 12%
15,000
50,000 10% 20%
40,000 8% 10,000
30,000 6% 19%
20,000 4% 5,000
18%
10,000 2%
0 0% - 17%
2012 2013 2014 2015 2016 2017 F 2018 F 2012 2013 2014 2015 2016 2017 F 2018 F
Robust free cash flow, expect higher dividend per share
We expect GGRM to book a robust free cash flow going forward as the company
needs less capex compared to five years ago (2011-2015). In addition, given a lesser
capex going forward, we estimate a stable payout ratio going forward at 75%
(similar to 2017F), and expect higher dividend per share going forward.
Figure 91. Free cash flow and capex as % of sales Figure 92. Dividend and payout ratio
IDRbn Free Cash Flow (L) Capex as % of sales (R) IDRbn Dividend (L) Dividend per share (L)
8,000 12% Payout ratio (R)
7,000 90%
6,000 10% 78% 75%
75% 75% 80%
6,000
70%
4,000 8% 5,000
60%
4,000 50%
2,000 6%
3,000 40%
- 4% 30%
2,000
20%
(2,000) 2% 1,000
10%
- 0%
(4,000) 0% 2011 2013 2015 2017 F 2019 F
2011 2012 2013 2014 2015 2016 2017 F 2018 F

Valuations
We initiate our coverage on GGRM with a trading buy rating and a target price of
IDR91,000/share, which was derived using DCF with a 7-year life span. Our WACC
assumption of 9.5% is derived from the following assumptions: Risk free (Rf) rate of
6.5%, market risk premium (MRP) of 5%, terminal growth rate of 3%, and equity
beta of 0.9x.
GGRM is currently trading at slightly above its 5-year average P/E at 17.8x forward
P/E, 48% discount from HMSP which is trading at 34.3x. We are taken with GGRM as
the company is projected to register higher free cash flow, stable margins, and
benefits from lesser competition from smaller players in the market given the
company’s strong position in the SKM FF segment.
Figure 93. GGRM’s forward P/E band

(x)
24
22 +2 Std Dev
20
+1 Std Dev
18
Avg PER
16
-1 Std Dev
14
12 -2 Std Dev
10
01/13 01/14 01/15 01/16 01/17

Gudang Garam (GGRM IJ/ Trading Buy/ TP: IDR91,000)
Table 24. Forecast and valuations

2015 2016 2017F 2018F
Revenue (IDRbn) 70,365 76,274 82,912 91,578
EBITDA (IDRbn) 11,653 12,058 12,998 14,623
Net profit (IDRbn) 6,426 6,677 7,329 8,414
EPS (IDR/share) 3,339.5 3,470.3 3,808.9 4,372.7
DPS (IDR/share) 800.0 2,600.0 2,602.7 2,856.7
ROE (%) 17% 17% 18% 19%
Dividend yield (%) 1% 3% 3% 4%
P/E ratio (x) 23.3 22.5 20.5 17.8
P/BV ratio (x) 4.0 3.8 3.6 3.4
EV/EBITDA (x) 1.5 1.5 1.3 1.1
Table 25. Income statement projection

IDRbn 2015 2016 2017F 2018F
Revenue 70,365 76,274 82,912 91,578
COGS 54,880 59,657 65,087 71,518
Gross Profit 15,485 16,617 17,825 20,060
Opex 5,579 6,644 7,019 7,768
Operating Profit 9,906 9,972 10,805 12,292
Other income/(expenses) 109 109 116 128
Interest income 50 41 48 93
Interest expense -1,430 -1,191 -1,237 -1,331
Profit before income tax 8,635 8,931 9,733 11,183
Income tax expenses -2,182 -2,258 -2,461 -2,828
Minority interest -27 4 57 59
Net profit 6,426 6,677 7,329 8,414
EBITDA 11,653 12,058 12,998 14,623

Table 26. Balance sheet projection

IDR bn 2015 2016 2017F 2018F
Cash and equivalents 2,726 1,595 4,653 7,217
Receivables 1,568 2,090 2,188 2,417
Inventories 37,256 37,545 39,109 41,036
Others 1,019 703 665 730
Total current assets 42,568 41,933 46,615 51,401
Fixed assets - net 20,106 20,499 20,462 20,421
Others 830 520 544 579
Total non-current assets 20,937 21,018 21,007 21,000
Total assets 63,505 62,952 67,622 72,400
ST Loan and CM 20,561 19,753 21,472 22,894
Accounts payables 2,370 1,118 1,446 1,589
Others current liabilities 1,114 767 965 993
Total current liabilities 24,045 21,639 23,883 25,477
Deferred tax liabilities 338 371 391 450
Others 1,114 1,377 1,405 1,556
Total non-current liabilities 1,452 1,749 1,797 2,005
Total liabilities 25,498 23,387 25,680 27,482
Minority interests 108 77 134 193
Shareholders' equity 37,900 39,487 41,808 44,725

Table 27. Cash flow statement projection

IDRbn 2015 2016 2017F 2018F
CF from operation
Net profit 6,426 6,677 7,329 8,414
Depreciation/amortization 1,715 2,063 2,193 2,330
Change in working capitals -1,702 -1,488 -1,311 -2,094
Others -3,357 56 218 200
CF from operation 3,082 7,308 8,427 8,850
CF from Investments
Net capex -2,848 -2,455 -2,156 -2,289
LT investments 0 0 0 0
CF from investments -2,848 -2,455 -2,156 -2,289
CF from financing activity
Increase/(decrease) in debt 2,414 -808 1,719 1,422
Increase/(decrease) in equity 0 0 0 0
Dividend payments -1,539 -5,003 -5,008 -5,497
Others 30 -173 75 78
CF from financing activity 904 -5,984 -3,213 -3,996
Increase (Decrease) in Cash 1,138 -1,131 3,058 2,564
Beginning balance 1,588 2,726 1,595 4,653
Ending balance 2,726 1,595 4,653 7,217
Table 28. Key ratio

2015 2016 2017F 2018F
Growth (%)
Revenue 8% 8% 9% 10%
EBITDA 16% 3% 8% 13%
Net profit 20% 4% 10% 15%
Profitability (%)
Gross margin 22% 22% 21% 22%
Operating margin 14% 13% 13% 13%
EBITDA margin 17% 16% 16% 16%
Net margin 9% 9% 9% 9%
ROE 17% 17% 18% 19%
ROA 10% 11% 11% 12%
Leverage (X)
Current ratio 1.8 1.9 2.0 2.0
Quick ratio 0.2 0.2 0.3 0.4
Debt to equity 0.7 0.6 0.6 0.6
Net debt to equity 0.6 0.6 0.5 0.5

APPENDIX 1
Important Disclosures & Disclaimers
Disclosures
As of the publication date, PT Mirae Asset Sekuritas Indonesia, and/or its affiliates do not have any special interest with the subject company and do not own
1% or more of the subject company's shares outstanding.
Stock Ratings Industry Ratings

Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving
Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes
Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening
Sell Relative performance of -10%
* Ratings and Target Price History (Share price (----), Target price (----), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆))
* Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months.
* Although it is not part of the official ratings at Mirae Asset Sekuritas Indonesia , we may call a trading opportunity in case there is a technical or short-term
material development.
* The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of
future earnings.
The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as general market and economic
conditions.
Analyst Certification
Opinions expressed in this publication about the subject securities and companies accurately reflect the personal views of the Analysts primarily responsible
for this report. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in
the past 12 months and have not been promised the same in connection with this report. No part of the compensation of the Analysts was, is, or will be
directly or indirectly related to the specific recommendations or views contained in this report but, like all employees of PT Mirae Asset Sekuritas Indonesia
Indonesia, the Analysts receive compensation that is impacted by overall firm profitability, which includes revenues from, among other business units, the
institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know
or have reason to know of any actual, material conflict of interest of the Analyst or PT Mirae Asset Sekuritas Indonesia Indonesia except as otherwise stated
herein.
Disclaimers
This report is published by PT Mirae Asset Sekuritas Indonesia Indonesia (“Daewoo”), a broker-dealer registered in the Republic of Indonesia and a member
of the Indonesia Exchange. Information and opinions contained herein have been compiled from sources believed to be reliable and in good faith, but such
information has not been independently verified and Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness,
accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Bahasa Indonesia. If this
report is an English translation of a report prepared in the Indonesian language, the original Indonesian language report may have been made available to
investors in advance of this report. Daewoo, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising
from the use hereof. This report is for general information purposes only and it is not and should not be construed as an offer or a solicitation of an offer to
effect transactions in any securities or other financial instruments. The intended recipients of this report are sophisticated institutional investors who have
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report would violate any laws and regulations or subject Daewoo and its affiliates to registration or licensing requirements in any jurisdiction should receive
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their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale,
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Tobacco

It’s all about the price tag

Hefty cigarette consumption in Indonesia

Consumer Indonesians’ love for kretek offers a natural barrier

Favorable excise tax scheme for 2018F

Initiate with an overweight stance

Tobacco companies covered in this report

Overview of Indonesia tobacco 3

Gudang Garam (GGRM) 55

Mirae Asset Sekuritas Indonesia Research 2

Overview of Indonesia tobacco

Indonesia’s tobacco industry is too big to ignore

Hefty cigarette consumption

Figure 1. Contribution to GDP (%) Figure 2. Distribution of cigarette consumption

Figure 3. Percentage of average expenditure per capita per month

Source: Ministry of Agriculture, Mirae Asset Sekuritas Research

Mirae Asset Sekuritas Indonesia Research 3

Indonesians’ love for kretek

Figure 4. Estimated number of smokers in Indonesia

Source: The Atlas, Mirae Asset Sekuritas Indonesia Research

Mirae Asset Sekuritas Indonesia Research 4

Hand rolled kretek (SKT) Hand rolled kretek (SKT)

Non kretek (White 39% Non kretek (White

Mirae Asset Sekuritas Indonesia Research 5

Five major players in the industry

Figure 7. Market share of cigarette companies

(%) Market share (%)

Source: Company data, Bloomberg, Mirae Asset Sekuritas Research

Hanjaya Mandala Sampoerna (HMSP)

Mirae Asset Sekuritas Indonesia Research 6

Figure 8. HMSP’s Dji Sam Soe and A brands

Source: Company data, Internet, Mirae Asset Sekuritas Research

Gudang Garam (GGRM)

Figure 9. GGRM’s brands

Source: Company data, Internet, Mirae Asset Sekuritas Research

Djarum (not listed)

Mirae Asset Sekuritas Indonesia Research 7

Figure 10. Djarum’s domestic and international brands

Djarum Super Djarum Black Djarum Bali Hai

Djarum Black Capucinno

Djarum 76 Djarum Black Tea

L.A Lights Djarum Special Djarum Vanilla

L.A Lights Menthol Djarum Light Djarum Menthol

Source: Company data, Internet, Mirae Asset Sekuritas Research

Bentoel International Investama (RMBA/not rated)

The fourth largest cigarette producer in Indonesia is Bentoel (RMBA/not rated).

Figure 11. RMBA’s products

Source: Company data, Internet, Mirae Asset Sekuritas Research

Mirae Asset Sekuritas Indonesia Research 8

Nojorono Tobacco International

Nojorono, established in 1932, is located in Kudus, Central Java and is privately

Figure 12. Nojorono brands

Source: Company data, Internet, Mirae Asset Sekuritas Research

Mirae Asset Sekuritas Indonesia Research 9

Cigarette types in Indonesia

Furthermore, in terms of cigarette segment, there are presently 5 major types of

 White cigarettes - Sigaret Putih Mesin (SPM)

 Hand rolled cigarettes - Sigaret Kretek Tangan (SKT): filterless kretek

 Filtered hand rolled cigarettes - Sigaret Kretek Tangan Filter (SKTF):

 Machine rolled cigarettes - Sigaret Kretek Mesin (SKM): machine-rolled,

Mirae Asset Sekuritas Indonesia Research 10

Table 1. Machine-rolled cigarettes