350.0 5 September 2016 303 308 314 309 312 314 8 August...

Asiamoney’s

2013

Best Domestic

Equity House

Sector flash

5 September 2016

Disclosure: Bahana Securities does and seeks to do business with companies covered in its research reports. Investors should consider this report as only a single factor in

making their investment decision.

Please see the important disclaimer information on the back of this report

*Based on consensus’ recent changes ↑ (up), ↓ (down), ↔ (unchanged)

8 August 2016

Indonesia Tobacco Neutral (Unchanged)

Michael W Setjoadi E-mail: [email protected] Phone: +6221 250 5081 ext. 3620

Got light

Possible 10-12% excise hike in 2017F, lower than 2016’s level of 15%

In the 2017 Budget (RAPBN), the government is budgeting only a 6% increase in

tobacco excise revenue to IDR149.9tn (exhibit 11) from 2016F’s 15% excise hike

for a target of IDR142tn. In our view, 2016’s huge ASP adjustments following the

15% excise tax jump will result in slower-than-expected industry volume growth

(2016F: -1 to -2% y-y). Furthermore, 7M16 realisation excise revenue only

accounted for 37% of 2016’s FY target. Even if we include the 2M16 excise

revenue this year, only 49% of the FY target would be reached, or about 6% lower

than the 7M14-15 average. Therefore, we believe the 2017F excise hike would

reach around 10-12% higher y-y instead of just 6%. This report marks transfers

of analyst coverage.

Competition from cheaper brands likely to limit pricing power

In terms of stick sales, the post-Lebaran festivities’ 2.4% m-m volume growth

may still result in the government’s inability to meet the 2016 excise revenue

target, unless the directorate general of excise decided to implement a similar

move to book excise receipts 2 months in advance as was performed at end-2015.

Going into 2017F, although the excise tax hike should be lower than in 2016F, we

believe the competition is still tough this year with BAT’s aggressive moves to take

up market share in Indonesia. Thus, we believe that HMSP and GGRM should

experience greater difficulties in passing on the higher excise tax ahead. At this

stage, we are still awaiting the final cigarette excise tax figure per stick to be

announced in October 2016.

HMSP – Preferred stock in the sector on strong brand equity

Despite increases in A Mild ASP by 12% ytd, HMSP has maintained its market

share of around 33% (exhibit 5), testimony to the company’s high brand equity.

This is despite BAT’s 5% discount on its Lucky Strike Mild products at the retail

level in the form of extra packs (i.e. 100 packs to obtain 5 extra packs). On a

brighter note, HMSP’s focus on the premium SKM FF segment should help support

margins through the launch of the one-of-a-kind “kretek” Marlboro with clove

called Marlboro Filter Black. HMSP will produce the product and pay a brand

royalty to Phillip Morris Indonesia (PMI), unlike the other Marlboro brands, where

HMSP only generates 3-5% distribution margins. We continue to like HMSP, and

maintain our BUY rating with a higher TP of IDR4,800 as we roll over our valuation

to 2017 (20% discount to UNVR at TP). Risks: Possible greater free float

requirement from the stock exchange with limited fund ownership, management

change and more intense competition.

GGRM – Market share drops mostly priced in; BUY on cheap valuation

GGRM has increased the price of its Surya ProMild by 3.7% to IDR706/stick,

closing the gap to A Mild at IDR1,108/stick (exhibit 12). This should help maintain

margins. Other positive catalysts for GGRM are its mass-market exposure and

undemanding valuation on 2017F PE of 18.6x, a 50% discount to HMSP, with a

lower 12-month TP of IDR72,300 (from IDR88,000), now based on a 2017F PE of

21x, translating to 13% upside potential. BUY. Risks: Extreme weather adversely

impacting farmers’ incomes and continued aggressive promotions by competitors.

Exhibit 1. Sector relative valuations, 2017F CP TP MKT CAP 2017F 2017F 2017F 2017F

RATING (IDR) (IDR) (USDm) PER (X) PBV (X) EV/EBITDA ROE (%)

HMSP IJ BUY 3,910 4,800 34,578 34.9 13.1 25.1 38.1

GGRM IJ BUY 64,000 72,300 9,362 18.6 2.9 11.7 14.9

Tobacco 43,940 31.4 10.9 22.2 33.2

Source: Bloomberg, Bahana Note: pricing as of 5 Sept 2016

Exhibit 2. Indonesia tobacco volume, 2005-18F

217 229 238 247 251 255

280 303 308 314 314 309 312 314

0.0

50.0

100.0

150.0

200.0

250.0

300.0

350.0

(bn sticks)

Machine-rolled clove Hand-rolled clove White cigarette

Source: Nielsen, Bahana

Exhibit 3. Tobacco market share, June 2016

33.0%

24.5%

21.1%

6.9%

3.6%

10.9%

HMSP GGRM Djarum RMBA Nojorono Others


Exhibit 4. Relative performance to JCI, ytd

Source: Bloomberg, Bahana

5 September 2016

Bahana Securities – Equity Research – Indonesia tobacco sector flash

Exhibit 5. HSMP key products’ monthly market share and ASP, 2H14-1H16

900

950

1,000

1,050

1,100

1,150

1,200

30.0

31.0

32.0

33.0

34.0

35.0

Jul-14 Jan-15 Jul-15 Jan-16 Jul-16

(IDR/stick)Market share (%)

A Mild (SKM LTLN) volume ASP per stick (RHS)

800

850

900

950

1,000

1,050

1,100

76.0

78.0

80.0

82.0

84.0



Marlboro (SPM) volume ASP per stick (RHS)

1,000

1,050

1,100

1,150

1,200

1,250

1,300

20.0

21.5

23.0

24.5

26.0



234 Kretek (SKT) volume ASP per stick (RHS)

700

800

900

1,000

10.0

12.0

14.0

16.0

18.0



Sampoerna Hijau (SKT) volume ASP per stick (RHS)

Source: Nielsen. Bahana, sorted by sales volume contribution to the company

A Mild maintaining its market share A Mild, which contributes around 40% to HMSP’s top line, has successfully maintained its market share despite the competitors having launched new products at much lower price points. For example, in December 2015, A Mild 16 was priced at IDR1,000/stick vs. Lucky Strike Mild by RMBA at IDR778/stick (22% discount to A Mild) vs. Dunhill Mild

at IDR819/stick (18% discount to A Mild). Even at this stage, these products are still being sold at similar discount rates to A Mild (exhibit 12). This shows HMSP’s high

brand equity and customers’ continued preference. On other brands, we believe Djarum’s product LA Bold has tapped into both the SKM FF (full flavor machine-rolled clove cigarette) and SKM LTLN (mild machine-rolled clove cigarette) segments, although GGRM has taken most of the hit (for further details, please refer to the next page).

HMSP maintains relatively

steady market share across

the segments, …

… particularly for A Mild

which has managed to

weather severe price

onslaught from competitors

5 September 2016


Exhibit 6. GGRM key products’ monthly market share and ASP, 2H14-1H16

900

950

1,000

1,050

1,100

1,150

1,200

15.0

17.0

19.0

21.0

23.0

25.0



GG Surya (SKM FF) volume ASP per stick (RHS)

850

950

1,050

1,150

1,250

12.0

14.0

16.0



GG International (SKM FF) volume ASP per stick (RHS)

600

650

700

750

800

850

900

5.0

7.0



Surya PRO Mild (SKM LTLN) volume ASP per stick (RHS)

650

700

750

800

850

900

950

7.0

9.0



GG Merah (SKT) volume ASP per stick (RHS)

Source: Nielsen, Bahana, sorted by sales volume contribution to the company

GG Surya’s market share erosion mainly due to LA Bold and Dunhill Filter GGRM’s market share in the SKM FF segment dropped from 56.4% in mid-2014 to 49.9% in July 2016, mostly to Dunhill Filter 16 and LA Bold products. LA Bold is currently selling at a 30% discount to Surya 16, while Dunhill Filter is at a 20% lower price. Note that Dunhill Filter has closed its gap to Surya 16 (when it was launched back in November 2014, Dunhill Filter was selling at IDR750/stick, a 28% discount

compared to Surya 16’s selling price of IDR960/stick). When launched in August 2015,

LA Bold was sold at a greater discount of almost 40% to Surya 16. Furthermore, both products offer the “Full Flavour” taste with lower tar and nicotine content (Dunhill Filter & LA Bold: 18-21mg tar and 1.2-1.5mg nicotine vs. Surya 16: 31mg tar and 2.2mg nicotine). As a result, Surya 16’s market share has dropped 6% in the past two years. Note that GGRM having increased Surya 16’s ASP by 8.4% since December 2015 has seen a market share loss of more than 3% y-y.

GGRM continues to lose

market share for its key

brands, such as Surya 16

and GG International;

however, …

… the pricing of LA Bold and

Dunhill Filter has been

experiencing narrowing

discounts to Surya 16

5 September 2016


Exhibit 7. Djarum key products’ monthly market share and ASP, 2H14-1H16

900

1,000

1,100

1,200

1,300

15.0

17.0

19.0

21.0

23.0

25.0



Djarum Super (SKM FF) volume ASP per stick (RHS)

600

650

700

750

800

850

-

2.0

4.0

6.0

8.0

10.0

12.0

Jul-15 Jan-16 Jul-16


LA Bold (SKM FF) volume ASP per stick (RHS)

600

650

700

750

800

850

1.0

2.0

3.0

4.0

5.0

6.0

7.0



Djarum Super Mild (SKM LTLN) volume ASP per stick (RHS)

800

850

900

950

1,000

1,050

1,100

4.0

4.5

5.0

5.5

6.0

6.5



LA lights (SKM LTLN) volume ASP per stick (RHS)


LA Bold continues to gain

market share despite its ASP

adjustments

5 September 2016


Exhibit 8. RMBA key products’ monthly market share and ASP, 2H14-1H16

700

750

800

850

900

-

2.0

4.0

6.0

8.0

Nov-14 Mar-15 Jul-15 Nov-15 Mar-16 Jul-16


Dunhill Filter (SKM FF) volume ASP per stick (RHS)

750

800

850

900

950

5.5

6.0

6.5

7.0

7.5



Dunhill Mild (SKM LTLN) volume ASP per stick (RHS)


Exhibit 9. Cigarette affordability relative to GDP/capita, by country

8,226

5,628 5,401

4,202 3,468 3,252

2,799 2,530 2,297

- 1,000 2,000 3,000 4,000 5,000 6,000 7,000 8,000 9,000

(packs of Marlboro)

Source: Worldbank, Bahana

Dunhill Mild has reached its

maturity stage, positive for A

Mild

Relative to GDP/capita,

cigarette prices in Indonesia

are the least affordable

compared to other countries

5 September 2016


Exhibit 10. Tobacco market share by segment, June 2016

8.2%

49.4%20.8%

7.0%

0.4%

14.3%

SKM FF

HMSP GGRM Djarum RMBA Nojorono Others

45.8%

7.5%

23.9%

9.7%

7.6%5.6%

SKM LTLN

39.2%

19.6%

22.7%

1.7%2.8%

13.9%

SKT

79.6%

1.5%0.0%4.5%0.0%

14.4%

SPM


Exhibit 11. Government excise tax receipt vs. FY realization, 7M14-16F

57.2

52.4

48.7

44.0

46.0

48.0

50.0

52.0

54.0

56.0

58.0

7M14 7M15* 7M16*

(%)

Excise duty receipt

Source: MoF, Bahana; Note: *assuming 2M16 advance excise receipt being distributed back to January and February 2016

GGRM lost 3% market share

in SKM FF y-y

At the current run rate, we

believe the FY16 excise

revenue realization should

be 9-10% below target,

assuming the government

does not front load next

year’s excise tax proceeds at

end-2016

5 September 2016


Exhibit 12. Key products’ market share and price list, Dec 2014-present

Machine-rolled Clove Jun-16

ytd Jun-

15 FY15

Producer (SKM) Full Flavor

Mkt share

(%)

Dec-

14

Apr-

15

Jun-

15

Oct-

15

Dec-

15

Mar-

16 Jun-16 Jul-16

Sep-

16

ASP

incr.

ASP

incr.

ASP

incr.

GGRM GG Surya 16 16.3 919 950 968 1,000 1,084 1,084 1,084 1,084 1,109

% increase

3.4% 1.9% 3.3% 8.4% 0.0% 0.0% 0.0% 2.3% 2.3% 5.3% 18.0%

Djarum

Djarum Super

12 15.8 954 996 1,033 1,050 1,088 1,121 1,138 1,146

% increase

4.4% 3.7% 1.6% 3.6% 0.0% 0.0% 0.7%

5.4% 8.3% 14.0%

GGRM

GG Internasional

12 12.5 929 979 1,004 1,021 1,100 1,121 1,121 1,121 1,142 % increase

5.4% 2.6% 1.7% 7.7% 1.9% 0.0% 0.0% 1.9% 3.8% 8.1% 18.4%

HMSP

234 Magnum

Filter 12 na 883 914 926 960 989 1,044 1,076 1,098 1,124

% increase

3.5% 1.3% 3.7% 3.0% 1.8% 2.1% 2.1% 2.3% 13.6% 4.9% 12.0%

RMBA Dunhill Filter 16 na

750 775 819 863 863 % increase

2.7% 0.7% 0.0%

11.3% na na

Machine-rolled

Clove Jun-16

ytd

Jun-

15 FY15

Producer Mild (LTLN)

Mkt share

(%)

Dec-

14

Apr-

15

Jun-

15

Oct-

15

Dec-

15

Mar-

16 Jun-16 Jul-16

Sep-

16

ASP

incr.

ASP

incr.

ASP

incr.

HMSP A Mild 16 32.0 875 906 932 961 1,000 1,029 1,069 1,088 1,108

% increase

3.5% 2.9% 3.1% 2.3% 0.0% 0.0% 1.8% 1.8% 10.9% 6.5% 14.2%

GGRM

GG Surya Pro

Mild 16 6.2 597 628 628 641 681 681 681 681 706

% increase

5.2% 0.0% 2.1% 6.2% 0.0% 0.0% 0.0% 3.7% 3.7% 5.2% 14.1%

Djarum LA Lights 16 4.7 797 850 869 881 919 956 963 975

% increase

6.6% 2.2% 1.4% 4.3% 0.0% 0.0% 1.3%

6.1% 9.0% 15.3%

GGRM GG Mild 16 1.1 653 684 684 697 781 781 781 781 794

% increase

4.7% 0.0% 1.9% 12.1% 0.0% 0.0% 0.0% 1.6% 1.6% 4.7% 19.6%

RMBA Dunhill Mild 16 na

819 875 900 900

% increase

3.7% 0.0% 0.0%

9.9% na na

RMBA

Lucky Strike

Lights 20 na

778 808 843 843

% increase

0.0% 0.6% 0.0%

8.4% na na

Machine-rolled

White Jun-16

ytd

Jun-

15 FY15

Producer (SPM)

Mkt share

(%)

Dec-

14

Apr-

15

Jun-

15

Oct-

15

Dec-

15

Mar-

16 Jun-16 Jul-16

Sep-

16

ASP

incr.

ASP

incr.

ASP

incr.

HSMP Marlboro 20 79.6 - - - - 900 913 931 949 968

% increase

1.5% 0.0% 2.0% 1.9% 1.9% 7.6% na na

RMBA

Dunhill Intl Filter

20 0.9

885 910 940 940

% increase

0.0% 0.5% 0.0%

6.2% na na

Machine-rolled

Clove Jun-16

ytd

Jun-

15 FY15

Producer

Bold (between

FF&LTLN)

Mkt share

(%)

Dec-

14

Apr-

15

Jun-

15

Oct-

15

Dec-

15

Mar-

16 Jun-16 Jul-16

Sep-

16

ASP

incr.

ASP

incr.

ASP

incr.

Djarum LA Bold 20 9.6

655 715 760 770

% increase

4.4% 2.0% 1.3%

17.6% na na

HMSP U Bold 1.0

769.5

% increase

4.0% 4.0%

Hand-rolled Clove Jun-16

ytd Jun-

15 FY15

Producer (SKT)

Mkt share

(%)

Dec-

14

Apr-

15

Jun-

15

Oct-

15

Dec-

15

Mar-

16 Jun-16 Jul-16

Sep-

16

ASP

incr.

ASP

incr.

ASP

incr.

HMSP 234 Kretek 12 22.8 998 1,013 1,043 1,056 1,069 1,085 1,117 1,117 1,124

% increase

1.5% 3.0% 1.2% 1.2% 0.0% 2.9% 0.0% 0.6% 5.1% 4.5% 7.1%

HMSP

Sampoerna A

Hijau 12 14.7 696 719 735 743 768 816 816 816 846

% increase

3.3% 2.2% 1.1% 2.2% 1.9% 0.0% 0.0% 3.7% 10.2% 5.6% 10.3%

Djarum

Djarum Coklat

12 12.4 721 754 771 796 812.5 837.5 845.83 854.17 % increase

4.6% 2.3% 3.2% 2.1% 1.0% 0.0% 1.0%

5.1% 6.9% 12.7%

GGRM GG Merah 12 8.5 671 708 733 746 796 808 808.33 808.33 825

% increase

5.5% 3.5% 1.8% 6.7% 1.5% 0.0% 0.0% 2.1% 3.6% 9.2% 18.6%

Djarum Djarum 76 12 7.3 721 754 771 796 812.5 837.5 845.83 854.17 % increase

4.6% 2.3% 3.2% 2.1% 1.0% 0.0% 1.0%

5.1% 6.9% 12.7%


5 September 2016


Exhibit 13. Key brands market placement RMBA

Tape (IDR) 12,000 19,500 16,000 20,000 14,200Distributor (IDR) 11,340 18,567 12,700 14,400 15,600Release Year 1988 2007 2013 2012 1999Nicotine (mg) 1.0 1.0 1.0 1.0 1.0 Tar (mg) 14.0 14.0 14.0 13.0 15.0 Tax per stick (IDR) 480 480 480 480 415 Amount per pack (sticks) 12 16 16 16 16 Price per stick (IDR) 945 1,160 794 900 975

Tape (IDR) 16,000 16,000 16,000 20,000 16,000 20,000

Distributor (IDR) 13,545 13,050 11,300 17,800 16,850 15,500

Release Year 2014 2005 2009 2,012 2016 2011

Nicotine (mg) 1.0 1.0 1.0 1.0 1.1 1.0

Tar (mg) 18.0 15.0 14.0 15.0 16.0 15.0

Tax per stick (IDR) 480 480 480 480 480 480

Amount per pack (sticks) 16 16 16 20 20 20

Price per stick (IDR) 847 816 706 890 843 775

Tape (IDR) 12,650 17,500 13,500 19,000 17,350 13,900 16,000

Distributor (IDR) 13,482 17,750 13,700 18,500 18,800 13,750 15,600

Shop 15,500 20,000 16,000 16,000 18,000

Hypermart 13,300 17,800 13,150 14,000 15,800

Release Year 2005 2001 1979 1907 1975 2000

Nicotine (mg) 2.3 2.2 2.2 31.0 1.2 1.8 1.6

Tar (mg) 33.0 31.0 31.0 2.0 12.0 32.0 25.0

Tax per stick (IDR) 480 480 480 480 480 480 480

Amount per pack (sticks) 12 16 12 16 20 12 16

Price per stick (IDR) 1,124 1,109 1,142 1,156 940 1,146 975

Tape (IDR) 10,000 18,500 16,000 16,000 20,000

Distributor (IDR) 9,234 na 13,750 13,800 15,400

Release Year 2015 1990 2009 2014 2015

Nicotine (mg) 2.1 2 1.7 1.5 1.2

Tar (mg) 32.0 33 25.0 21.0 18.0

Tax per stick (IDR) 480 325 480 480 480

Amount per pack (sticks) 12 12 16 16 20

Price per stick (IDR) 770 na 859 863 770

Tape (IDR) 13,775 10,075 9,700 10,250

Distributor (IDR) 13,482 10,152 9,900 10,250

Release Year 1913 1968 1960 1976

Nicotine (mg) 2.3 2.2 1.0 38

Tar (mg) 39.0 38.0 14.0 2.4

Tax per stick (IDR) 320 245 320 320

Amount per pack (sticks) 12 12 12 12

Price per stick (IDR) 1,124 846 825 854

Flu

ll F

lavour

SKT

HMSP GGRM Djarum

Mild p

rem

ium

Mild

Full F

lavour

Pre

miu

m

Source: Worldbank, Bahana

Djarum and BAT have been

disrupting the industry in the

past one year by offering

products with much lower

price points (e.g. LA bold

and Dunhill)

5 September 2016


HM Sampoerna Year to 31 December 2014 2015 2016F 2017F 2018F PROFIT & LOSS (IDRbn) Sales 80,690 89,069 96,670 106,195 115,709 Gross profit 20,500 21,764 23,804 25,965 28,020 EBITDA 14,235 14,467 16,566 17,820 18,930 Depreciation 430 419 475 517 557 EBIT 13,805 14,048 16,091 17,303 18,372 Net interest inc./(expense) 10 (69) 86 329 308 Forex gain/(losses) - - - - - Other income/(expense) (111) (62) (105) (105) (105) Pre-tax profit 13,704 13,917 16,072 17,527 18,575 Taxes 3,537 3,569 4,139 4,514 4,784 Minority interest - - - - - Extraordinary gain/(losses) - - - - - Net profit 10,167 10,347 11,933 13,013 13,791

BALANCE SHEET (IDRbn) Cash and equivalents 65 1,719 8,230 7,691 6,929 S-T investments - - - - - Trade receivables 1,010 2,459 2,669 2,931 3,194 Inventories 17,432 19,072 20,124 21,699 23,221 Fixed assets 5,920 6,281 6,578 7,035 7,430 Other assets 3,955 8,481 7,479 7,916 8,329 Total assets 28,381 38,011 45,079 47,273 49,104 Interest bearing liabilities 2,835 - - - - Trade payables 2,761 3,191 2,639 2,847 3,050 Other liabilities 9,286 2,804 8,835 9,738 10,588 Total liabilities 14,883 5,995 11,474 12,586 13,637 Minority interest - - - - - Shareholders' equity 13,498 32,016 33,604 34,687 35,468

CASH FLOW (IDRbn) EBIT 13,805 14,048 16,091 17,303 18,372 Depreciation 430 419 475 517 557

Working capital 1,172 (9,032) 3,749 (1,117) (1,045) Other operating items (4,304) (4,624) (2,876) (4,480) (4,791) Operating cash flow 11,103 811 17,440 12,224 13,094 Net capital expenditure (1,641) (781) (772) (974) (953) Free cash flow 9,462 30 16,668 11,249 12,142 Equity raised/(bought) (21) 20,414 - - - Net Borrowings 393 (2,835) - - - Other financing (10,427) (15,955) (10,157) (11,788) (12,903) Net cash flow (592) 1,654 6,512 (539) (762) Cash flow at beginning 657 65 1,719 8,230 7,691 Adjustments in RE - - - - - Cash flow at end 65 1,719 8,230 7,691 6,929

RATIOS ROAE (%) 73.5 45.5 36.4 38.1 39.3 ROAA (%) 36.5 31.2 28.7 28.2 28.6 Gross margin (%) 25.4 24.4 24.6 24.4 24.2 EBITDA margin (%) 17.6 16.2 17.1 16.8 16.4 EBIT margin (%) 17.1 15.8 16.6 16.3 15.9 Net margin (%) 12.6 11.6 12.4 12.3 11.9 Payout ratio (%) 98.4 120.3 100.0 100.0 100.0

Current ratio (x) 1.5 6.6 3.7 3.5 3.4 Interest coverage (x) 291.2 101.5 na na na Net gearing (%) 20.5 nc nc nc nc Debts to assets (%) 10.0 - - - - Debtor turnover (days) 54 17 41 41 41 Creditor turnover (days) 5 10 10 10 10 Inventory turnover (days) 106 103 101 99 97

MAJOR ASSUMPTIONS Machine-rolled cigarette volume (bn sticks) 69.0 70.9 69.1 71.9 74.0 Machine-rolled cigarette ASP (IDR/stick) 758 825 924 998 1,078 Hand-rolled cigarette volume (bn sticks) 24.6 23.1 20.2 18.6 16.9 Hand-rolled cigarette ASP (IDR/stick) 706 784 870 957 1,053 Marlboro volume (bn sticks) 16.1 15.9 15.3 15.3 15.1 Marlboro ASP (IDR/stick) 755 839 923 1,024 1,137 Excise tax hike 15.7 11.6 15.0 10.0 10.0

Source: Company, Bahana estimates

Likely continued strong top line growth on maintained market share

Healthy balance sheet position post the rights issue

Efficient investment in capex with the current utilization rate of around 80%

Continued increase in the ROAE, despite some pressure on the margins

Industry volume expected to contract by 1-2% this year

5 September 2016

Gudang Garam Year to 31 December 2014 2015 2016F 2017F 2018F PROFIT & LOSS (IDRbn) Sales 65,186 70,366 77,735 85,584 94,229 Gross profit 13,380 15,486 17,007 18,737 20,630 EBITDA 9,662 11,180 11,498 12,264 13,028 Depreciation 1,440 1,715 1,933 2,170 2,437

EBIT 8,221 9,465 9,565 10,094 10,591 Net interest inc./(expense) (1,372) (1,430) (1,748) (1,835) (1,927) Forex gain/(losses) 17 72 (15) (26) - Other income/(expense) 389 528 607 668 735 Pre-tax profit 7,255 8,635 8,410 8,901 9,399 Taxes 1,822 2,182 2,125 2,250 2,375 Minority interest 27 17 38 30 31 Extraordinary gain/(losses) - - - - - Net profit 5,406 6,436 6,246 6,621 6,993

BALANCE SHEET (IDRbn) Cash and equivalents 1,588 2,726 1,983 1,752 1,292 S-T investments - - - - - Trade receivables 1,532 1,568 1,732 1,907 2,100 Inventories 34,739 37,256 41,226 45,053 49,401 Fixed assets 18,973 20,106 22,204 24,437 26,946 Other assets 1,401.29 1,849.01 2,042.66 2,248.90 2,476.06 Total assets 58,234 63,505 69,188 75,398 82,215 Interest bearing liabilities 18,147 20,561 21,589 22,669 23,802 Trade payables 4,871 2,370 2,623 2,887 3,428 Other liabilities 2,081.34 2,565.98 2,834.72 3,120.93 3,436.17 Total liabilities 25,100 25,498 27,047 28,677 30,666 Minority interest 134 108 105 111 117 Shareholders' equity 33,000 37,900 42,036 46,610 51,431

CASH FLOW (IDRbn) EBIT 8,221 9,465 9,565 10,094 10,591 Depreciation 1,440 1,715 1,933 2,170 2,437 Working capital (5,224) (5,050) (3,872) (3,727) (3,989) Other operating items (2,779.76) (2,929.00) (3,318.93) (3,472.44) (3,598.48) Operating cash flow 1,658 3,201 4,307 5,065 5,441 Net capital expenditure (5,625) (2,848) (4,030) (4,403) (4,947) Free cash flow (3,967) 352 277 661 494 Equity raised/(bought) - - - - - Net Borrowings 5,169 2,414 1,028 1,079 1,133 Other financing 4,142 777 (1,017) (899) (961) Net cash flow 175 1,129 (740) (238) (467) Cash flow at beginning 1,404 1,588 2,726 1,983 1,752 Adjustments in RE 10 8 (3) 6 6 Cash flow at end 1,589 2,726 1,983 1,752 1,292

RATIOS ROAE (%) 17.4 18.2 15.6 14.9 14.3 ROAA (%) 9.9 10.6 9.4 9.2 8.9 Gross margin (%) 20.5 22.0 21.9 21.9 21.9

EBITDA margin (%) 14.8 15.9 14.8 14.3 13.8 EBIT margin (%) 12.6 13.5 12.3 11.8 11.2 Net margin (%) 8.3 9.1 8.0 7.7 7.4 Payout ratio (%) 36.6 29.0 32.8 32.8 32.8 Current ratio (x) 1.6 1.8 1.8 1.9 1.9 Interest coverage (x) 6.0 6.6 5.5 5.5 5.5 Net gearing (%) 50.2 47.1 46.6 44.9 43.8 Debts to assets (%) 31.2 32.4 31.2 30.1 29.0 Debtor turnover (days) 34 16 16 16 17 Creditor turnover (days) 9 8 8 8 8 Inventory turnover (days) 245 248 248 246 245

MAJOR ASSUMPTIONS Hand-rolled cig (SKM) vol. (mn sticks) 72,551 70,161 69,109 69,800 70,498 SKM ASP (IDR/stick) 810 903 1,011 1,102 1,202 Hand-rolled (SKT) vol. (mn sticks) 8,046 8,486 8,656 8,742 8,830 SKT ASP (IDR/stick) 608 687 763 839 923 GGRM's market share 24.2 23.8 23.9 24.0 24.2

Source: Company, Bahana estimates

Earnings growth likely to decline in order to maintain market share

Increased leverage position …

... on increased capex

Margins should continue to

decline on tougher competition

Single-digit top-line growth in 2016-18F on regulatory challenges and competition

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Stock ratings are based on absolute upside or downside, which is the difference between the target price and the current market price. Unless otherwise specified, these ratings are set with a 12-month horizon. It is possible that future price volatility may cause a temporary mismatch between upside/downside for a stock based on the market price and the formal rating. "Buy": the price of the security is expected to increase by 10% or more. "Hold": the price of the security is expected to range from an increase of less than 10% to a decline of less than 5%. "Reduce": the price of the security is expected to decline by 5% or more.

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