Indonesia Tobacco: Bahana’s December 2020 retail cigarette price survey
Based on our survey this month, we note the following: 1) no retail ASP adjustments for GGRM/HMSP’s products; 2) minor retail price adjustments for select Japan Tobacco/RMBA products; and 3) sluggish sales volume recovery in 4Q20. Meanwhile, based on PMK 198, the MoF has decided against raising the HJE in 2021, another negative surprise, in our view. Reaffirm Underweight call.
A quiet month for GGRM/HMSP; minor price hikes from JT and RMBA
There was no retail price adjustment for GGRM and HMSP products this month. Meanwhile, Japan Tobacco’s Camel White saw a retail ASP increase of 1.5% m-m, alongside its Camel Mild Option Purple and Camel Yellow. It is worth noting that this is the first adjustment for the Camel brand since 1Q20, according to our survey. Bentoel’s (RMBA) Dunhill Mild 20 also saw a 0.2% m-m retail price hike, which we believe merely reflects ex-factory price adjustments in October.
Sluggish sales volume recovery, led by ketengan
GT outlet owners informed us that: 1) overall sales volume in 4Q20 (as of mid-December) is largely similar or even slightly below that of 3Q20; and 2) ketengan (single-stick) sales-volume growth remains better than pack-sales growth. This is consistent with our findings in previous months: 1) down-trading prevalence remains high; and 2) many consumers in Jakarta prefer to trade-down to ketengan, instead of switching brands/products.
Absence of HJE adjustments for 2021 is another negative surprise
Based on the ratified Ministry of Finance (MoF) regulation (PMK 198), the cigarette retail selling price (Harga Jual Eceran/HJE) will remain flat in 2021. This is another negative surprise, in our view, as previously the MoF stated that the HJE would be adjusted, similar to the magnitude of the excise increase (see: Steep Tier-1 SKM/SPM excise tariff hike for next year, 11 December 2020). Given that EPS is generally 5-7x more sensitive to pricing (vs. volume), price hikes are imperative. However, doing so will likely prove to be more difficult for GGRM/ HMSP, given the absence of HJE adjustments for 2021. On a separate note, the excise tariff adjustments are in-line with the MoF’s previous statements. The 2021 excise goes into effect 1 February 2021 (vs. 1 January, in previous years), with use of 2020 excise ribbons allowed until 1 March 2021 (vs. 1 February, in previous years), due to the late announcement of the 2021 excise tariff.
Reaffirm Underweight stance on the sector
Margin contraction is inevitable, in our view, as price adjustments will likely be challenging for GGRM/HMSP, given that: 1) the purchasing power recovery is likely to be gradual (near-zero minimum wage hike and sluggish job market recovery); and 2) widened excise gap between Tier-1 SKM/SPM and Tier-2 SKM/SPM (and also SKM vs. SKT) and the delayed introduction of an excise tier simplification plan could potentially lead to higher down-trading prevalence. The steep Tier-1 SKM excise tariff hike, even in the wake of the pandemic, signals a more unfavorable government stance towards the sector, which warrants a sector de-rating, in our view. We reaffirm our Underweight stance on the sector, with SELL ratings on Gudang Garam (GGRM IJ, IDR41,075) and HM Sampoerna (HMSP IJ, IDR1,505). Key upside risks to our sector call include better-than-expected sales volume in 2021, higher-than-expected price adjustments, and a faster-than-expected HJE enforcement.