In the first half of 2017 corporate earnings of Gudang Garam were positive. The company recorded a 8.9 percent year-on-year (y/y) rise in sales to IDR 40.2 trillion (approx. USD $3.0 billion) in H1-2017. This performance is in contrast to the overall performance in Indonesia's tobacco industry which basically shows a decline since 2015 amid a series of tobacco excise tax hikes and other measures that aim at curbing the consumption of cigarettes in Indonesia (for example tougher regulations for tobacco advertisement).

Therefore, most analysts say that Indonesia's tobacco industry is heading for its "sunset" even though, today, this industry remains one of the biggest industries in Indonesia, reflected by the huge market capitalization of HM Sampoerna and Gudang Garam on the Indonesia Stock Exchange (both are positioned within the top ten).

However, the tougher context has resulted in falling volumes of cigarette output in Indonesia. 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".

Therefore, Indonesia's largest cigarette producer HM Sampoerna saw its sales decline 1.5 percent (y/y) to IDR 46.6 trillion in H1-2017. Another big tobacco company, Wismilak Inti Makmur, experienced a more severe 15.7 percent (y/y) drop in sales to IDR 760.7 billion over the same period.

Gudang Garam, on the other hand, experienced a 2.4 percent (y/y) growth in cigarette production to 38.6 billion cigarettes in H1-2017. The company has three main business segments: (1) hand-rolled clove cigarettes, (2) machine-rolled clove cigarettes, and (3) low tar nicotine cigarettes.

The higher excise tax has a big impact on the corporate earnings of Gudang Garam because taxes and excises account for about 75 percent of the company's total expenses. In H1-2017 Gudang Garam's total expenses reached IDR 31.8 trillion. Slightly over IDR 24 trillion of this total went into taxes and excises, while only IDR 6.5 trillion were costs related to the purchase of raw materials.

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

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

in billion IDR

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

in billion IDR

Recently, the Indonesian government said it is planning to introduce another cigarette excise tax at the start of 2018. This would be another major blow to the industry because it already experienced heavy hikes in recent years. At the start of 2015 the excise tax on a package of hand-rolled clove (kretek) cigarettes was set at IDR 3,660 (approx. USD $0.28). One year later it was raised by 12.1 percent to IDR 4,104 per package, followed by a 8.1 percent hike to IDR 4,438 in 2017.

Meanwhile, the excise tax on a package of machine-rolled kretek cigarettes was IDR 6,503 at the start of 2015. After a 15.9 percent hike it rose to IDR 7,537 in 2016, followed by a 10 percent hike to IDR 8,293 per package in 2017. Indonesia's machine-rolled clove cigarettes are hit harder by the government's excise tax plans because it wants to limit the impact on the labor-intensive hand-rolled cigarettes industry as an excessive hike could lead to layoffs.

Muhaimin Moefti, Chairman of the White Cigarette Manufacturers Association (Gaprindo), urges the government to reconsider its desire to raise the cigarette excise tax again at the start of 2018 as it would have a major negative impact on the industry. Moreover, it could encourage illegal cigarette production and distribution across the country.

Stock Performance Comparison Four Cigarette Companies:*

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

* normalized stocks, 1 January 2017 = 100

Bahas