Indonesia Tobacco: Bahana’s January 2021 retail cigarette price survey
price increases for select products of GGRM/HMSP; 2) minor retail price adjustment for Djarum’s Super MLD; and 3) slightly better sequential sales volume trend in January. Maintain Underweight.
First ex-factory adjustment of the year by HMSP reflected at retail level
HMSP’s Marlboro Filter Black, Marlboro Red, and A Mild, saw retail ASP increases of 1.3-3.7% m-m, following ex-factory price adjustments in early January and/or previous months. Meanwhile, GGRM’s Surya 16 saw a retail ASP adjustment of +1.3% m-m, merely reflecting ex-factory price changes in the previous months. We also note that Djarum’s Super MLD retail ASP increased by 0.9% m-m, reflecting its ex-factory price hike in December 2020.
Marginal improvement in sequential demand
Most GT outlet owners reported marginal m-m improvement in the overall sales volume this month (as of mid-January). It is worth noting, however, that some owners are delaying the re-stocking of less popular products and/or maintaining retail prices of certain products despite ex-factory price adjustments by cigarette producers. For instance, an owner mentioned that he decided to keep the A Mild price unchanged (at least until the older inventory is depleted), in spite of HMSP’s ex-factory price hike on January 11, as pack sales remained soft. We continue to believe that overall demand is likely to remain weak this year (see: Indonesia Consumer - A slow march back to normal, 20 January 2021).
Adding WIIM’s products to our monthly retail cigarette price survey
As of this month, we are adding select Wismilak’s (WIIM IJ, Not rated) products to our monthly retail cigarette price survey. We will track the prices of Diplomat (SKM FF) and Diplomat EVO (SKM LTN) in order to monitor the pricing trend of SKM Tier-1 vs. Tier-2, which could help in assessing the prevalence of higher/lower down-trading. Based on our monthly retail price survey and estimation, Diplomat has complied with the 2020 HJE and the price of Diplomat EVO only needs to be increased by 4.1%, while prices of GGRM’s/HMSP’s VFM (value-for-money) products still need to be increased by 8-15%/1-10%. This, coupled with our expectation of a gradual purchasing power recovery, means down-trading trend is likely to continue into 2021, but will be less severe than in 2020.
Maintain Underweight stance on the sector
Margin contraction is inevitable, in our view, as price adjustments will likely be challenging for GGRM/HMSP, given: 1) a purchasing power recovery is likely to be gradual (near-zero minimum wage hike and sluggish job market recovery); and 2) the 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 means the down-trading trend is likely to continue into 2021. 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 maintain our Underweight stance on the sector, with HOLD/SELL ratings on GGRM/HMSP. Key upside risks to our TPs for GGRM/HMSP (based on 11x/16x 2021E EPS) include better-than-expected 2021 sales volumes, higher-than-expected price adjustments, and a faster-than-expected HJE enforcement.