7/23/2019 GG-Credit Suisse http://slidepdf.com/reader/full/gg-credit-suisse 1/18 CREDIT SUISSE SECURITIES RESEARCH & ANALYTICSBEYOND INFORMATION ® Client-Driven Solutions, Insights, and Access Equity Research Asia Pacific / IndonesiaTobacco23 April 2015Gudang Garam (GGRM.JK) UPGRADE RATINGThe Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas. Looking through the smokeIn the right spot. A mix of strong brand name, pricing power, product mix, and volume growth in a tough environment makes GG a strong contender in the Indonesian consumer space, while its costs and revenues are almost entirely rupiah based, making it immune to the currency volatility. The fact that the stock has fallen 13% YTD and underperformed the market by 17% makes it an attractive investment opportunity. Upgrade to OUTPERFORM (from Neutral). Worries discounted; offers a buying opportunity. The market has overreacted to the potential excise tax hike and higher VAT. If this happens, we believe that GG has the ability to pass these through, as it has consistently done in the past. Turning cash flow positive. The favourable product mix in favour of machine-made cigarettes should boost margins. Further, lower raw material costs, and lower employee costs should provide a fillip to GG's profitability. This improved profitability coupled with completed expansions resulting in lower capex is turning GG free cash flow positive starting this year. Upgrade TP to Rp66,800. Our valuation puts GG firmly below its peers globally and within Indonesia's consumer space, with higher growth rate (17% CAGR over 2015E-17E). GG has traded at a relative P/E of 1.25x over the past five years which gives us a target P/E of 20x, similar to the weighted average valuation of global peers. Currently it is trading 1 std. dev. below this five-year average. Our new TP of Rp 66,800 implies a 26% upside from current levels. GG has an undemanding valuation, and it is trading at a discount to its five- year historical average relative P/E…Source: Company data, Bloomberg RESEARCH ANALYSTS Ella Nusantoro62 21 255 37917 [email protected]DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. 0.8 0.9 1.0 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Rel PE Avg Rel PE STDEV +1 STDEV -1 Avg (2010-15): 1.25 Bbg/RIC GGRM IJ / GGRM.JK Rating (prev. rating) O (N) Shares outstanding (mn) 1,924.09 Daily trad vol - 6m avg (mn) 0.9 Daily trad val - 6m avg (US$ mn) 3.7 Free float (%) 23.6 Major shareholders Suryaduta Investama (69.29%) Price (22 Apr 15 , Rp) 53,100 TP (prev. TP Rp) 66,800 (53,500) Est. pot. % chg. to TP 26 52-wk range (Rp) 63700.0 - 48100.0 Mkt cap (Rp/US$ bn) 102,169.1/ 7.9 Performance 1M 3M 12M Absolute (%) 4.8 (9.2) 1.1 Relative (%) 4.9 (11.4) (10.2) Year 12/13A 12/14A 12/15E 12/16E 12/17E Revenue (Rp bn) 55,437 65,186 74,518 83,340 93,440 EBITDA (Rp bn) 7,721 10,018 11,854 13,243 15,117 Net profit (Rp bn) 4,329 5,369 6,423 7,398 8,798 EPS (Rp) 2,250 2,790 3,338 3,845 4,573 - Change from prev. EPS (%) n.a. n.a. 7 6 12 - Consensus EPS (Rp) n.a. n.a. 3,086 3,542 3,915 EPS growth (%) 7.8 24.0 19.6 15.2 18.9 P/E (x) 23.6 19.0 15.9 13.8 11.6 Dividend yield (%) 1.5 1.5 2.0 2.4 2.8 EV/EBITDA (x) 14.7 11.9 10.1 8.9 7.7 P/B (x) 3.5 3.1 2.7 2.4 2.1 ROE (%) 15.5 17.2 18.2 18.5 19.4 Net debt(cash)/equity (%) 39.3 49.8 46.3 36.3 29.6 Note 1: Gudang Garam is Indonesia's leading tobacco company. It produces the full range of kretek cigarettes including hand-made (SKT) and machine-made (SKM) cigarettes, both in full flavoured and low-tar, low-nicotine, under brands such as GG Merah, GG Surya and GG FI. IDEAS ENGINE SERIES
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®
Client-Driven Solutions, Insights, and Access
Equity Research Asia Pacific / Indonesia
Tobacco 23 April 2015
Gudang Garam (GGRM.JK)UPGRADE RATING
The Ideas Engineseries showcasesCredit Suisse’s uniqueinsights and investmentideas.
Looking through the smoke
In the right spot. A mix of strong brand name, pricing power, product mix, andvolume growth in a tough environment makes GG a strong contender in theIndonesian consumer space, while its costs and revenues are almost entirelyrupiah based, making it immune to the currency volatility. The fact that the stockhas fallen 13% YTD and underperformed the market by 17% makes it anattractive investment opportunity. Upgrade to OUTPERFORM (from Neutral).
Worries discounted; offers a buying opportunity. The market hasoverreacted to the potential excise tax hike and higher VAT. If this happens,we believe that GG has the ability to pass these through, as it hasconsistently done in the past.
Turning cash flow positive. The favourable product mix in favour ofmachine-made cigarettes should boost margins. Further, lower raw materialcosts, and lower employee costs should provide a fillip to GG's profitability.This improved profitability coupled with completed expansions resulting inlower capex is turning GG free cash flow positive starting this year.
Upgrade TP to Rp66,800. Our valuation puts GG firmly below its peersglobally and within Indonesia's consumer space, with higher growth rate(17% CAGR over 2015E-17E). GG has traded at a relative P/E of 1.25xover the past five years which gives us a target P/E of 20x, similar to theweighted average valuation of global peers. Currently it is trading 1 std. dev.below this five-year average. Our new TP of Rp 66,800 implies a 26%upside from current levels.
GG has an undemanding valuation, and it is trading at a discount to its five-year historical average relative P/E…
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity ofthis report. Investors should consider this report as only a single factor in making their investment decision.
Consumers are switching to machine-made kretek cigarettes (SKM) from hand-rolled cigarettes(SKT) due to their aging profile and higher clove prices (impacting SKT more than SKM). Thisbenefits Gudang Garam (GG), as 90% of its products are SKM-based. The shift to SKM,particularly SKM FF (fully flavoured) is in line with the results of Credit Suisse's IndonesiaConsumer Survey 2015, where smokers said they continued to prefer SKM to SKT.
We expect GG to continue to gain market share in machine-rolled cigarettes (SKM). We arelooking at GG to have a 5% volume growth on 7% higher ASP over the next two years, with themarket share in 2014 estimated to have been at about 23%. We believe that these assumptionsare higher than what the consensus is building into the valuations. GG has demonstrated itsability to pass on prices, with its ASP witnessing a 10% CAGR in the last four years, and despitethe tough environment, its volume still witnessed a 4% CAGR during the period.
Worries discounted; offers a buying opportunity
The market has overreacted, in our view, on the potential excise tax hike and higher VAT, as
the parliament approved the 2015 Government of Indonesia (GoI) budget revisions in February.The GoI is seeking a 24% YoY growth in excise tax revenue, or about 10% of the totaltargeted tax revenue of Rp1,489.3 tn. Even though there is no clarity thus far on how the newtarget will be achieved, the GoI stated that the increase will come from: (1) clamping down onillegal cigarettes, and (2) a better tax collection mechanism.
If the increase happens, we believe that GG has the ability to pass these through, as it hasconsistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to10% (from the current 8.4%) and an excise duty hike to 5% will require price increases of 5%and 8%, respectively, to maintain profitability, assuming other things remain similar.
Turning cash flow positive
We have adjusted our estimates on GG by about 7% for this year and next, on the back ofhigher margins that result from a better product mix as well as its ability to increase prices, andas clove prices remain stable. GG also has lower employee costs thanks to its product mix. Atthe same time, capex is expected to decline as it completes its three-year expansionprogramme. Free cash flow is turning positive starting this year, with an improving net margin.
Upgrade TP to Rp66,800
Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which isbelow -1 std dev. In our view this is not warranted given the company's improving performance.We upgrade our rating to OUTPERFORM with a target price of Rp66,800/share (up fromRp53,500/share), implying a 20x 2015E P/E, which is equal to its average historical relativeP/E of 20x. This valuation is also similar to the weighted average of forward earnings ofcigarette companies globally, whose earnings are lower than GG's. GG's earnings areestimated to witness a 17% CAGR over 2015E-17E. Compared with the other consumercompanies in Indonesia, which on average trade at about 30-35x forward earnings, we believeGG's valuation is warranted, given that its revenue and costs are mostly IDR-based, and thusimmune to the fluctuation in exchange rates.
Last year, GG saw its volume increase 5% YoY to 80bn sticks, whilst the industry, as reportedby Nielsen, saw volume decline 0.8% YoY to 349bn sticks. Thus, GG is estimated to have hada market share of 23% in 2014, up from 21% in the previous year. The decline in the industryvolume has mostly been due to SKT (hand-rolled kretek cigarettes) products, comprising only10% of GG's total volume, and down 14% YoY.
On the other hand, the industry volume for SKM FF (machine made fully flavoured kretekcigarettes) was up 6% YoY and SKM low-tar, low-nicotine (LTLN) was up 3% YoY. GG is onthe right spot, with a majority (90% of total volume) of its products being SKM-based. Its SKMFF (accounts for 76% of total volume) saw a 6% YoY volume growth last year, and SKM LTLNgrew 14% YoY (accounting for 14% of total), despite its SKT products declining 12% YoY.We estimate a 5% volume growth over the next two years.
In 1Q15, Philip Morris International's (PM.N, US$84.98, NEUTRAL, TP US$80) 1Q15earnings release stated that the volume for Indonesia's cigarette industry grew 5.9% YoY to78bn, even though PMI views that the quarterly figures are volatile, thus only expecting a 2%
increase YoY this year. Volume for SKT still declined 1.7% YoY (accounting for 19% of totalvolume), while volume for SKM grew 2% YoY (accounting for 75% of total volume). GG hasyet to release its 1Q15 earnings, which is expected by the end of the month.
Figure 7: GG – volume vs volume growthYoY
Figure 8: GG – volume composition
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
The shift to SKM FF is in line with the results of Credit Suisse's Indonesia Consumer Survey2015. The smokers continue to prefer SKM to SKT, and SKM FF is the leading choicecompared with SKM LTLN. (Please refer to our report "Indonesia Consumer Survey 2015:Welcome to the fast lane..." published 9 February 2015)
In our survey, of the total, 33% of smokers preferred SKM FF (32% in last year's survey).Those that favoured SKM LTLN were down to 28%, from 30%, and SKT smokers are now at22% (versus 24% in the 2013 survey)—the lowest in the five years we have done the survey.This was underpinned by higher clove prices, which led to higher price increases in SKT. Wealso think that the aging profile that SKT has, might have resulted in a shift towards theyounger profile that preferred SKM. White cigarettes (SPM) continue to be the least populartype, only favoured by 6% of respondents—relatively stable from our previous survey.Interestingly, higher and lower income earners prefer SKM FF more compared to other types,while middle income earners prefer SKM LTLN and SKT.
By age group, the younger generations preferred SKM LTLN or white cigarettes, while theolder generations preferred SKT, and SKM FF is favoured by all age groups. Of ourrespondents in the age group below 30, 36% are fans of SKM LTLN, as compared to 32%
preferring SKM FF and 14% liking SKT products.
68 69
73
77
80
85
90
94
0%
1%
2%
3%
4%
5%
6%
7%
60
65
70
75
80
85
90
95
100
2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 01 5E 2 0 16 E 2 01 7E
Sales vol (bn sticks) YoY growth (%)
83% 8 4% 8 4% 88% 9 0% 90% 90% 90%
17% 1 6% 1 6% 12% 10% 1 0% 10 % 1 0%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2 01 0 2 01 1 2 01 2 2 01 3 2 01 4 2 01 5E 2 0 16 E 2 01 7E
* Note: SKM FF is machine-made full-flavored kretek cigarettes, SKM LTLN is machine-made low-tar, low-
nicotine kretek cigarettes, and SKT is hand-rolled kretek cigarettes.
Source: Credit Suisse Indonesia Consumer Survey 2015
Pricing power is seen...
GG has increased its ex-factory prices thrice this year, with the last increase being on 13 April.The increase has been due to the excise tax hike, which became effective 1 Jan 2015. Unlikein other countries, cigarette producers in Indonesia have been unable to pass through theincrease in excise tax immediately, instead choosing to implement it gradually. This is becausecigarette in Indonesia, at the street level, is still mostly sold by sticks instead of by packs, whichwe view is due to consumers' weak buying power.
Excise cost and VAT accounted for 68% of GG's total cost last year. The new excise taxincrease is 5.5% for SKT (hand-rolled cigarettes) and 10.7% for SKM (machine-madecigarettes) for Tier 1 producers (those that produce more than 2bn sticks a year). Excise costfor SKT is now at Rp319/stick and Rp457/stick for SKT, inclusive of the 10% regional tax. Inaddition to that, the GoI also charges an 8.4% on VAT costs on the banderole prices.
Figure 10: Indonesia's latest excise tax scheme, effective on 1 January 2015* Type Tier Annual
Overall, GG has increased its average price by about 3-6% YTD, depending on the product. Bycomparison, last year, GG increased its prices an average 10-16%, depending on the product.Thus its blended ASP last year increased 12% YoY to Rp793/stick, of which there was a 12%increase in SKM products (Rp813/stick) and a 9% increase in SKT products (Rp602/stick).We estimate a blended ASP increase of 8% this year, on 6% higher volume growth YoY.Interestingly, not many know that, since 2008 GG's cigarette prices have been rising higherthan that of Indofood's noodle prices (post the end of price war). GG's blended ASP increasedat a 10% CAGR over 2008-14, with SKM increasing 10% and SKT 9%, while Indofood's
noodle prices increased 8% during this period.Figure 11: Prices have been rising… Figure 12: …to keep up with the tax
increase
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Figure 13: GG – ASP comparables – noodlesvs cigarettes (in value)
The parliament has approved the 2015 Government of Indonesia (GoI) budget revisions at theend of February 2015, with a new revised target of excise tax of Rp145.7tn, or 24% higherYoY (2014: Rp117.45tn). The amount is around 10% of the total targeted tax revenue ofRp1489.3 tn.
Though there is no clarity thus far on how the new target will be achieved, the GoI stated thatthe increase will come from: (1) illegal cigarettes, and (2) a better tax collections mechanism, inaddition to the expected volume growth and revenue from the new duty that has beenimplemented since the beginning of the year.
We are sceptical that the GoI will be able to get revenue from illegal cigarettes given that 90%of cigarettes sold in Indonesia are kretek, which are only produced in Indonesia, and illegalcigarettes are mostly home-based industry for SKT products.
On tax collections, on the other hand, it is still possible to ask producers to pay in cash forbanderole purchases instead of providing a two-month credit. This might add around Rp10-15tn in additional revenue to the GoI book. However, if this happens, it will disrupt the cash flowof the cigarette producers for the month, unless it can be done through instalments.
Alternatively, the easiest way is to further increase the excise tax, even though that will hurtvolumes.
Figure 15: Gol excise tax revenue target Figure 16: Excise tax to total revenue and toGDP
Source: Ministry of Finance Source: Ministry of Finance
Sensitivity analysis on the excise tax and VAT increase
If the increase happens, we believe that GG has the ability to pass these through, as it hasconsistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to10% (from current 8.4%) and an excise duty rise to 5% will require price increases of 5% and
8%, respectively, to maintain profitability, assuming other things remain similar.Indonesia vs India – Why is it different?
India's cigarette sector has been underperforming the Indian market by 26% in the past oneyear, as the government has been implementing stricter measures on the sector, by increasingthe cigarette tax by over 35% within a span of ten months, and considering putting restrictionson sale of loose sticks of cigarettes. The Indian government has been looking to promotingpublic health by cutting down on smokers. The fear of that the happenings in India could getreplicated in Indonesia could have been behind the weakness Gudang Garam's shares. Theinvestors might have shied away as the GoI is targetting a higher revenue from excise tax.Nonetheless, in our view, the difference is that in India, excise tax revenue only accounts for~1% of total tax revenue, while in Indonesia, it accounts for about 10%. The GoI is looking toincrease tax, and not limiting the cigarette volume. Cigarette sale in India is around 100bn, athird of what is sold in Indonesia.
With the better product mix (higher proportion on SKM FF) and price increases, GG's blendednet revenue margin (NRM) improved. NRM is calculated based on the revenue derived fromdeducting the excise and VAT costs. As of April 2015, GG's SKT (GG Merah) has an NRM of46.8%, and its SKM FF (GG FIM 45.1% and GG Surya at 43.7%), while the NRM for SKMLTLN (GG Mild 28% and GG Pro Mild 18.5%) is still half of that of SKM FF, and they areimproving. This is compared to the end of 1Q14, of 42.8% for SKT, 44.4% for GG FIM and43.8% for GG Surya (flat), while for SKM LTLN products, improvement is seen in GG Mild,from 23.2%, while Pro Mild is still lower at 18.5%.
In 1Q15, NRM is seen declining due to the rise in the excise tax, of which GG has yet to fullypassed on to the consumers, nevertheless, as seen historically, NRM will catch up in thefollowing quarters.
Figure 17: Net revenue of GG cigarettes Figure 18: Net revenue margin of GG cigarettes
Source: Company data Source: Company data
Helped by the stable clove price as well
We have seen clove prices (the main raw material for kretek cigarettes and mostly grown inIndonesia) rise over the last three years, due mainly to poor harvest. This has resulted in at leastthree events that changed the industry's dynamic: (1) decline in margins as clove pricesincreased, (2) decline in consumption of SKT cigarettes as SKT used more clove than SKM,thus becoming more expensive, (3) plently of small-sized SKT producers (such as home-basedindustry) closing down. In all, as a result, smokers switched to SKM FF products, among otherreason, as well as the aging profile of the SKT cigarettes.
There is no index available for the movement of clove prices as the planting and usage of cloveis mostly in Indonesia. Clove prices increased from Rp50K/kg in 2010 to Rp120K/kg in 2011,and peaked at Rp220/kg in 2012. In 2013 and 2014, clove prices came down and it sold atabout Rp140K/kg to Rp160K/kg. It has currently stabilised at about Rp130K/kg toRp140K/kg. Both clove and tobacco and other ingredients, accounted for about 27% of GG'stotal costs in 2014 (up from 23% in 2010). We estimate raw materials costs to account forabout 26% of total costs going forward. Note that clove and tobacco are purchased from thefarmers and have to be aged first, between three months to eighteen months, depending onthe quality, before they can be of use.
Coupled with the ability to gradually increase its pricing, GG's gross margin is expected toimprove from its lowest at 15.8% in 2007, to 20.5% in 2014. We estimating gross margin tobe at around 21-22% going forward. Gross profit is estimated to grow at 14% CAGR 15E-17E, from 11% CAGR 10-14. Figure 19: GG – cost breakdown Figure 20: GG – gross profit vs gross margin
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Higher ad cost expected this year, but labour cost todecline
The largest part of GG's opex comprises transportation, freight, and advertising-related costs.The company does not provide a detailed break-up on these three items. In 2013, with thelaunch of its SKM LTLN (GG Pro Mild and GG Mild), GG started a more aggressive campaign,which pushed up its advertising costs. The company combined its transportation, freight, andadvertising costs together, which accounted for 37% of opex, or 3% of its total revenue in2013. In 2014, with no new significant product launch, and as it was an election period, itsmarketing campagin slowed down, leading to its advertising costs declining 14% YoY, or 2% ofits total revenue (28% of total opex). We expect the company's advertising events to be moreaggressive this year, as such, we assume the transportation, freight, and advertising costs toaccount for 2.7% of total revenue this year, or up 50% YoY, and increase to 3% goingforward. We've also taken into consideration the rise in fuel prices (which has been increasedtwice as of Apr 15).
GG booked a one-off charge on employee compensation due to an early retirementprogramme, amounting to ~Rp500 bn in FY14. This was the result of weak demand for SKTproducts, which is more labour intensive, while SKM products are continuing to grow. Itsnumber of employees were down 16% YoY at 36,456 at the end of 2014. As such, GG's
employee compensation increased 49% YoY in FY14, accounting for 37% of its total opex(2.7% of total sales), as compared to 28% of total opex, or 2.2% of its total sales in FY13. Weexpect employee compensation to decline 10% this year and account for 2.2% of its revenueor 29% of its opex.
As i ts gross margin improves, GG's operating margin also improved to 13.2% in 2014, from12% in 2013, but is yet to reach 16.3% seen in 2011 (its lowest was 8.3% in 2006). We areexpecting the operating margin to be at 13.6% this year with the operating profit expected towitness a 14% CAGR over 2015-17E, from a 10% CAGR during 2010-14. Figure 21: GG – opex breakdown, 2013 Figure 22: GG – opex breakdown, 2014
Source: Company data Source: Company data
Figure 23: GG – number of employees in
each quarter
Figure 24: GG – operating profit vs
operating margin
Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates
Lower capex, free cash flow turns positive
Since 2012, GG has spent a significant amount on capex, totalling Rp14 tn. This includespurchase of machineries for production and packaging, and for both replacement as well as forexpansion on the production of SKM. It is also building new warehouses and has resorted to
modernisation to create a better vertically integrated production facility. We view that themassive capex cycle is completed, with its capex estimated to be at Rp3 tn this year, and Rp2tn each in the next two years, which mostly is for capex maintenance. With the lower capex andcoupled with the operational improvement, GG's free cash flow is expected to turn positive thisyear onwards. We continue to assume a 38% dividend payout ratio, which will provide adividend yield of around 2%.
For GG, debt is short term, mostly to finance its working capital, whereas a majority is topurchase raw materials. We estimate debt to be at Rp17 tn this year, from Rp18 tn last year,with the debt-to-equity still at a low 0.45x.
In all, we estimated GG's net profit to grow at a much higher rate – at 17% CAGR over2015E-17E, as compared to 7% CAGR during 2010-14. Its net margin is expected to be8.6% this year, and recover to 9.4% in 2017E, from 7.8% in 2013.
We have adjusted our estimates on GG on the back of higher margins that result from a betterproduct mix as well as its ability to increase prices, and as clove prices remain stable. Thecompany also has lower employee costs thanks to its product mix. At the same time, capex isexpected to decline as it completes its three-year expansion programme. Free cash flow isturning positive starting this year, with an improving net margin.
Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which isbelow -1 std dev. In our view this is not warranted given the company's improving performance.We upgrade our rating to OUTPERFORM with a target price of Rp66,800 (up from Rp53,500),implying a 20x 2015E P/E, which is equal to its average historical relative P/E of 20x. Thisvaluation is also similar to the weighted average of forward earnings of cigarette companiesglobally, whose earnings are lower than GG's. GG's earnings are estimated to witness a 17%CAGR over 2015E-17E. Compared with the other consumer companies in Indonesia, which onaverage trade at about 30-35x forward earnings, we believe GG's valuation is warranted, giventhat its revenue and costs are mostly IDR-based, and thus immune to the fluctuation inexchange rates.
Figure 31: Gudang Garam—change in earnings
Old New Change YoY growthRpbn 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E
I, Ella Nusantoro, certify that (1) the views expressed in this report accurately reflect my personal views abou t all of the subject companies and securities and (2) no part of my compensation was, is or will be di rectly orindirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Gudang Garam (GGRM.JK)
GGRM.JK Closing Price Target Price
Date (Rp) (Rp) Rating
31-Jul-12 56,350 50,000 U
31-Oct-12 49,150 44,600
26-Feb-13 49,450 46,100
15-Jul-13 45,600 40,300
17-Sep-13 43,000 37,500
06-Apr-14 48,900 46,200
07-Apr-14 50,200 46,200 N
31-Oct-14 57,750 53,500
* Asterisk signifies initiation or assumption of coverage.
UNDERPERFORM
NEUTRAL
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of whi ch are generated by Credit Suisse's investment
banking activities
As of December 10, 2012 Analysts’ stock rating are defined as follows:
Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all com panies co vered by the analy st within the relev ant secto r, withOutperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total returnrelative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractiveinvestment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2n d October 2012 U.S. and Canadianratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-monthrolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional be nchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse'sengagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/orvaluation:
Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.
*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
Credit Suisse's distribution of stock ratings (and banking clients) is:
Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 43% (53% banking clients)
Neutral/Hold* 38% (50% banking clients)
Underperform/Sell* 16% (44% banking clients)
Restricted 3%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, resp ectively; however, the meanings are not the same,as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinionsstated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connectionwith Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Gudang Garam (GGRM.JK)
Method: Our target price of Rp66,800/share for Gudang Garam implies a 20x P/E 2015E at the target price, with an estimated 17% estimated earnings growth over the next two years. We derive our target price
using discounted cash flow (DCF) method, where we are assuming 9.8% WACC on 5 .2% terminal growth. Our weighted average cost of cap ital (WACC) assumes a 7.5% risk-free rate, 0.5 beta, 5% risk premium,and a 28% corporate tax.
Risk: The following risks could impede the achievement of our Rp66,800/share target price for Gudang Garam. (1) Change in government regulation: There is no specific timeline as to when the GoI (Government of
Indonesia) is going to revise excise tax regulations. In the past two years, the tax has been revised yearly, and was favourable to SKM (machine-made cigarettes) and tier 1 companies (large-size producers,producing more than 2 bn sticks), narrowing the gap in tax to the SKT (hand rolled cigarettes) and mid and smaller size producers. (2) Strong demand for low tar, low nicotine: GG's brands in the low-tar, low-nicotine category include the Nusantara series and Surya Slim series, and last year it launched Surya Slim Premium and Surya Pro Mild. However, its presence in this category is relatively small. Low-tar, low-nicotine kretek cigarettes have been posting strong growth in the past decade, particularly for younger smokers in urban areas. (3) Consumers down-trading to less expensive cigarettes: If the GoI increases theexcise tax, cigarettes will become more expensive, encouraging consumers to downtrade to cheaper products. (4) Weak consumer purchasing power: Although the consumer confidence index, surveyed by BankIndonesia, showed that the confidence of Indonesian consumers is rising, concerns about the possibility of higher inflation (due to the recent increase in electricity tariffs) might disrupt consumer affordability. (5)Rising interest rates: GG's debt is usually Rupiah-denominated and in the form of short-term loans. This is used for raw materials (clove) purchasing, where typically the harvest season peaks at the end of 4Q and1Q (depending on the weather). A rise in interest rates would increase its interest expense, hence affecting its profitability.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (0322.HK, 051900.KS, 1044.HK, 1216.TW, 2914.T, 8113.T, BATO.KL, BATS.L, EMP.PS, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) currently is, or wasduring the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T, 4911.T,8113.T, BATO.KL, BATS.L, COLG.BO, EMAM.BO, EMP.PS, GLSM.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) within the next 3 months.
As of the date of this report, Credit Suisse makes a market in the following subject companies (PM.N).
Credit Suisse may have interest in (GGRM.JK, ICBP.JK, INDF.JK, KLBF.JK, UNVR.JK)
Credit Suisse may have interest in (BATO.KL)
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (033780.KS, IMT.L).
Credit Suisse has a material conflict of interest with the subject company (051900.KS) . Credit Suisse is acting as exclusive financial advisor to LG Household & Health Care Ltd. for the acquisition of Everlife Co., Ltd. from
CLSA Sunrise Capital, L.P.Credit Suisse has a material conflict of interest with the subject company (BATS.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchaseagreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.
Credit Suisse has a material conflict of interest with the subject company (IMT.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchaseagreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GGRM.JK, 0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T,4911.T, 8113.T, BATO.KL, BATS.L, COLG.BO, DABU.BO, EMAM.BO, EMP.PS, GLSM.BO, GOCP.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, ITC.BO, KLBF.JK, MRCO.BO, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS)within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investmentdealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.
Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (IMT.L).
The following disclosed European company/ies have estimates that comply with IFRS: (BATS.L, IMT.L, SWMA.ST).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (1216.TW, 2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N, URC.PS) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. researchanalysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASDRule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
PT Credit Suisse Securities Indonesia .............................................................................................................................................. Ella Nusantoro
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
References in this report to Credit Suisse include all of the subsidiaries and affiliates of Credit Suisse operating under its investment banking division. For more information on our structure, please use the following link : https://www.credit-suisse.com/who_we_are/en/This report may contain material that is notdirected to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject Credit Suisse AG or its affiliates("CS") to any registration or licensing requirement within such jurisdiction. All material presented in this report, unless specifically indicated otherwise, is under copyright to CS. None of the material, nor its content, nor any copy of it, may be altered in any way, transmitted to, copied or distributed to any other party,without the prior express written permission of CS. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of CS or its affiliates. The information, tools and material presented in this report are provided to you for information purposesonly and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. CS may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. CS will not treat recipients ofthis report as its customers by virtue of their receiving this report. The investments and services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. Nothingin this report constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to your individual circumstances, or otherwise constitutes a personal recommendation to you. CS does not advise on the tax consequences of investments and youare advised to contact an independent tax adviser. Please note in particular that the bases and levels of taxation may change. Information and opinions presented in this report have been obtained or derived from sources believed by CS to be reliable, but CS makes no representation as to their accuracy orcompleteness. CS accepts no liability for loss arising from the use of the material presented in this report, except that this exclusion of liability does not apply to the extent that such liability arises under specific statutes or regulations applicable to CS. This report is not to be relied upon in substitution for theexercise of independent judgment. CS may have issued, and may in the future issue, other communications that are inconsistent with, and reach different conclusions from, the information presented in this report. Those communications reflect the different assumptions, views and analytical methods of theanalysts who prepared them and CS is under no obligation to ensure that such other communications are brought to the attention of any recipient of this report. Some investments referred to in this report will be offered solely by a single entity and in the case of some investments solely by CS, or an associate ofCS or CS may be the only market maker in such investments. Past performance should not be taken as an indication or guarantee of future performance, and no representation or warranty, express or implied, is made regarding future performance. Information, opinions and estimates contained in this report
reflect a judgment at its original date of publication by CS and are subject to change without notice. The price, value of and income from any of the securities or financial instruments mentioned in this report can fall as well as rise. The value of securities and financial instruments is subject to exchange ratefluctuation that may have a positive or adverse effect on the price or income of such securities or financial instruments. Investors in securities such as ADR's, the values of which are influenced by currency volatility, effectively assume this risk. Structured securities are complex instruments, typically involve a highdegree of risk and are intended for sale only to sophisticated investors who are capable of understanding and assuming the risks involved. The market value of any structured security may be affected by changes in economic, financial and political factors (including, but not limited to, spot and forward interest andexchange rates), time to maturity, market conditions and volatility, and the credit quality of any issuer or reference issuer. Any investor interested in purchasing a structured product should conduct their own investigation and analysis of the product and consult with their own professional advisers as to the risksinvolved in making such a purchase. Some investments discussed in this report may have a high level of volatility. High volatility investments may experience sudden and large falls in their value causing losses when that investment is realised. Those losses may equal your original investment. Indeed, in thecase of some investments the potential losses may exceed the amount of initial investment and, in such circumstances, you may be required to pay more money to support those losses. Income yields from investments may fluctuate and, in consequence, initial capital paid to make the investment may be usedas part of that income yield. Some investments may not be readily realisable and it may be difficult to sell or realise those investments, similarly it may prove difficult for you to obtain reliable information about the value, or risks, to which such an investment is exposed. This report may provide the addresses of, orcontain hyperlinks to, websites. Except to the extent to which the report refers to website material of CS, CS has not reviewed any such site and takes no responsibility for the content contained therein. Such address or hyperlink (including addresses or hyperlinks to CS's own website material) is provided solelyfor your convenience and information and the content of any such website does not in any way form part of this document. Accessing such website or following such link through this report or CS's website shall be at your own risk. This report is issued and distributed in Europe (except Switzerland) by CreditSuisse Securities (Europe) Limited, One Cabot Square, London E14 4QJ, England, which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. This report is being distributed in Germany by Credit Suisse Securities(Europe) Limited Niederlassung Frankfurt am Main regulated by the Bundesanstalt fuer Finanzdienstleistungsaufsicht ("BaFin"). This report is being distributed in the United States and Canada by Credit Suisse Securities (USA) LLC; in Switzerland by Credit Suisse AG; in Brazil by Banco de Investimentos CreditSuisse (Brasil) S.A or its affiliates; in Mexico by Banco Credit Suisse (México), S.A. (transactions related to the securities mentioned in this report will only be effected in compliance with applicable regulation); in Japan by Credit Suisse Securities (Japan) Limited, Financial Instruments Firm, Director-General ofKanto Local Finance Bureau (Kinsho) No. 66, a member of Japan Securities Dealers Association, The Financial Futures Association of Japan, Japan Investment Advisers Association, Type II Financial Instruments Firms Association; elsewhere in Asia/ Pacific by whichever of the following is the appropriatelyauthorised entity in the relevant jurisdiction: Credit Suisse (Hong Kong) Limited, Credit Suisse Equities (Australia) Limited, Credit Suisse Securities (Thailand) Limited, regulated by the Office of the Securities and Exchange Commission, Thailand, having registered address at 990 Abdulrahim Place, 27th Floor,Unit 2701, Rama IV Road, Silom, Bangrak, Bangkok 10500, Thailand, Tel. +66 2614 6000, Credit Suisse Securities (Malaysia) Sdn Bhd, Credit Suisse AG, Singapore Branch, Credit Suisse Securities (India) Private Limited (CIN no. U67120MH1996PTC104392) regulated by the Securities and Exchange Boardof India (registration Nos. INB230970637; INF230970637; INB010970631; INF010970631), having registered address at 9th Floor, Ceejay House, Dr.A.B. Road, Worli, Mumbai - 18, India, T- +91-22 6777 3777, Credit Suisse Securities (Europe) Limited, Seoul Branch, Credit Suisse AG, Taipei SecuritiesBranch, PT Credit Suisse Securities Indonesia, Credit Suisse Securities (Philippines ) Inc., and elsewhere in the world by the relevant authorised affiliate of the above. Research on Taiwanese securities produced by Credit Suisse AG, Taipei Securities Branch has been prepared by a registered Senior Business
Person. Research provided to residents of Malaysia is authorised by the Head of Research for Credit Suisse Securities (Malaysia) Sdn Bhd, to whom they should direct any queries on +603 2723 2020. This report has been prepared and issued for distribution in Singapore to institutional investors, accreditedinvestors and expert investors (each as defined under the Financial Advisers Regulations) only, and is also distributed by Credit Suisse AG, Singapore branch to overseas investors (as defined under the Financial Advisers Regulations). By virtue of your status as an institutional investor, accredited investor,expert investor or overseas investor, Credit Suisse AG, Singapore branch is exempted from complying with certain compliance requirements under the Financial Advisers Act, Chapter 110 of Singapore (the "FAA"), the Financial Advisers Regulations and the relevant Notices and Guidelines issued thereunder, inrespect of any financial advisory service which Credit Suisse AG, Singapore branch may provide to you. This information is being distributed by Credit Suisse AG, Dubai Branch, duly licensed and regulated by the Dubai Financial Services Authority (DFSA), and is directed at Professional Clients or MarketCounterparties only, as defined by the DFSA. The financial products or financial services to which the information relates will only be made available to a client who meets the regulatory criteria to be a Professional Client or Market Counterparty only, as defined by the DFSA, and is not intended for any otherperson. This research may not conform to Canadian disclosure requirements. In jurisdictions where CS is not already registered or licensed to trade in securities, transactions will only be effected in accordance with applicable securities legislation, which will vary from jurisdiction to jurisdiction and may require thatthe trade be made in accordance with applicable exemptions from registration or licensing requirements. Non-U.S. customers wishing to effect a transaction should contact a CS entity in their local jurisdiction unless governing law permits otherwise. U.S. customers wishing to effect a transaction should do soonly by contacting a representative at Credit Suisse Securities (USA) LLC in the U.S. Please note that this research was originally prepared and issued by CS for distribution to their market professional and institutional investor customers. Recipients who are not market professional or institutional investorcustomers of CS should seek the advice of their independent financial advisor prior to taking any investment decision based on this report or for any necessary explanation of its contents. This research may relate to investments or services of a person outside of the UK or to other matters which are notauthorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority or in respect of which the protections of the Prudential Regulation Authority and Financial Conduct Authority for private customers and/or the UK compensation scheme maynot be available, and further details as to where this may be the case are available upon request in respect of this report. CS may provide various services to US municipal entities or obligated persons ("municipalities"), including suggesting individual transactions or trades and entering into such transactions. Anyservices CS provides to municipalities are not viewed as "advice" within the meaning of Section 975 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. CS is providing any such services and related information solely on an arm's length basis and not as an advisor or fiduciary to themunicipality. In connection with the provision of the any such services, there is no agreement, direct or indirect, between any municipality (including the officials, management, employees or agents thereof) and CS for CS to provide advice to the municipality. Municipalities should consult with their financial,accounting and legal advisors regarding any such services provided by CS. In addition, CS is not acting for direct or indirect compensation to solicit the municipality on behalf of an unaffiliated broker, dealer, municipal securities dealer, municipal advisor, or investment adviser for the purpose of obtaining orretaining an engagement by the municipality for or in connection with Municipal Financial Products, the issuance of municipal securities, or of an investment adviser to provide investment advisory services to or on behalf of the municipality. If this report is being distributed by a financial institution other than CreditSuisse AG, or its affiliates, that financial institution is solely responsible for distribution. Clients of that institution should contact that institution to effect a transaction in the securities mentioned in this report or require further information. This report does not constitute investment advice by Credit Suisse to the clientsof the distributing financial institution, and neither Credit Suisse AG, its affiliates, and their respective officers, directors and employees accept any liability whatsoever for any direct or consequential loss arising from their use of this report or its content. Principal is not guaranteed. Commission is the commission
Investment principal on bonds can be eroded depending on sale price or market price. In addition, there are bonds on which investment principal can be eroded due to changes in redemption amounts. Care is required wheninvesting in such instruments.When you purchase non-listed Japanese fixed income securities (Japanese government bonds, Japanese municipal bonds, Japanese government guaranteed bonds, Japanese corporate bonds) from CS as a seller, you will be requested to pay the purchase price only.