In Indonesia's tobacco industry the machine-rolled cigarette segment has grown sharply in recent years, now accounting for 75 percent of total cigarette sales, while clove cigarettes - known as kretek - account for 19 percent and white cigarettes account for the remaining six percent of sales. As the kretek cigarettes are mostly hand-rolled (implying it is a labour-intensive industry) the government has set a lower tax for kretek cigarettes (to avert a rise in unemployment as companies need to cut on wages or raise the price of cigarettes in order to optimize profitability).

The looming higher tobacco taxes will have a negative impact on the financial performance of Indonesia's largest cigarette producers: HM Sampoerna, Gudang Garam, Wismilak Inti Makmur and Bentoel Internasional Investama. However, sales may be boosted if the Indonesian economy will indeed accelerate after five years of slowing economic growth. The World Bank expects that Indonesia's economic growth will grow 5.3 percent (y/y) next year from an estimated growth pace of 4.7 percent (y/y) in 2015.

HM Sampoerna, Indonesia's largest tobacco company (controlling slightly over 30 percent of the market), is expected to see the continuation of a lower gross margin (the difference between revenue and cost of goods sold divided by revenue) amid increasing competition in the industry. In 2013 the company's gross margin was 26.8 percent. It fell to 25.4 percent in 2014 and is estimated to decline further to 24.3 percent in 2015. At the same time, HM Sampoerna's market share in the tobacco industry has also been on the decline during these years.

Gudang Garam, on the other hand, has been able to maintain its market share at around 23 percent (since 2010). This company also has a lower price-to-earnings ratio (at 21 times) compared to HM Sampoerna (at 48 times).

Stock Performance Listed Tobacco Companies versus Jakarta Composite Index (JKSE):*

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

* normalized stocks, 1 January 2015 = 100