In recent years the Indonesian government has implemented several measures to curb consumption of tobacco products in Indonesia. For example, room for cigarette advertisement has been cut in media, while graphic warnings now have to be displayed on the packages.

Moreover, almost every year the government raises the excise tax on tobacco products. A new average 10.04 percent hike will become effective per 1 January 2018.

But despite these challenges, Gudang Garam's corporate earnings continue to improve. In the first nine months of 2017, the company's sales rose 9.4 percent (y/y) to IDR 61.5 trillion (approx. USD $4.6 billion), while its net profit grew 17.9 percent (y/y) to IDR 5.4 trillion.

These improving corporate earnings are remarkable considering tobacco consumption in Indonesia is on the decline. In the first half of 2017 total cigarette production in Indonesia fell 0.8 percent (y/y) to a total of 140.8 billion "death sticks".

Net profit of its biggest rival, HM Sampoerna, only rose 2.4 percent to IDR 9.3 trillion in Q3-2017. This performance is not as strong but, at least, it still posts growth. It are actually the smaller players - such as Wismilak Inti Makmur and Bentoel Internasional Investama - that are affected the most by aforementioned negative issues in the cigarette industry. The two leading cigarette manufacturers, HM Sampoerna and Gudang Garam, continue to post growth. It is also interesting to note that both these companies are among the top ten of biggest companies listed on the Indonesia Stock Exchange (in terms of market capitalization). Hence, the cigarette industry still is a huge industry in Indonesia.

Stock Quote Gudang Garam - GGRM:

However, the higher excise tax does have an impact on the corporate earnings of Gudang Garam because taxes and excises account for about 75 percent of the company's total expenses.

Still, UOB Kay Hian recently revised its target price for Gudang Garam shares from IDR 74,000 to IDR 84,500 a piece, implying this broker sees plenty of room for growth of Gudang Garam shares. NH Korindo Sekuritas even set its target for Gudang Garam at IDR 97,825 per share.

Stock Performance Comparison Four Listed Cigarette Companies:*

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

* normalized stocks, 1 January 2017 = 100