HMSP Greater Market Penetration 20180531 NHKS Company Report (English)

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Company Report | May 31, 2018

HMSP posted the growth of 2.5% in sales from IDR22.5 trillion in the 1Q17

sales into IDR23.1 trillion in the 1Q18 sales. However, its net profit edged

down by 8% from IDR 3.29 trillion in 1Q17 into IDR3.03 trillion in 1Q18.

The

hike of 11% in excise duties imposed on cigarette

is the logical takeaway

for the decline in profit growth because the soaring excise duties resulted

in the soaring portion of excise duties to sales from 45% in 1Q17 into 51%

in 1Q18.

HMSP remains the top pick stock underlined by

its success in expanding its

market share from 33.0% in 1Q17 into 33.2% in 1Q18

. The stellar sales of

light flavor machine

rolled cigarette (SKM),

namely Marlboro Filter Black

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Asia Pacific Cigarette Company

A Glance at HMSP

HMSP produces a number of prominent clove cigarette such as Sampoerna A, Sampoerna

Kretek, Sampoerna U, and Dji Sam Soe the “Raja Kretek”. It is the affiliation of Philip

Morris International Inc., an internationally prominent cigarette maker.

HMSP led the cigarette market share in Indonesia with the market share of 33.2%. It sells

and distributes cigarette through 104 sales-area office across Indonesia.

HMSP’s Competitiveness in Asia Passific

Having market capitalization topping USD10 billion,

HMSP has the first-highest ROE of

37.3%

, then ITC Ltd in India has the second-highest ROE of 23.1%. Backed by vastly

expanded markets shares and better cost efficiency, HMSP’s net profit likely nudges up

1.9% in 2018

HMSP high P/E valuation of 34.7x positions HMSP as the cigarette maker with the most

expensive valuation in Asia Pacific. However, its free floating of 7.5% and expensive

valuation point

investors’ high interests in HMSP’s stock

.

Source: Bloomberg, NHKS research

Company

Market Cap

(USD mn)

Total Asset

(USD mn)

Net Profit

Growth

Net Profit

Margin

ROE

P/E

P/BV

Dividend

Yield

HMSP

31,825

3,175

1.9%

12.1%

37.3%

34.7x

12.9x

2.8%

GGRM

10,886

4,649

8.5%

9.2%

19.2%

17.0x

3.1x

3.5%

India

ITC Ltd

48,770

8,625

10.1%

24.3%

23.1%

30.7x

6.8x

1.8%

VST Industries Ltd

699

123

9.2%

17.7%

36.9%

27.2x

8.5x

2.5%

Godfrey Phillips India Ltd

645

340

-19.3%

6.0%

8.5%

30.7x

2.5x

1.0%

Malaysia

British American Tobacco Bhd

1,936

257

-31.7%

16.4%

99.0%

15.4x

19.8x

9.4%

Japan

Japan Tobacco Inc

55,837

46,380

-6.9%

18.3%

15.0%

13.6x

1.9x

4.7%

South Korea

KT&G Corp

12,635

9,346

-5.4%

24.9%

15.7%

10.7x

1.6x

4.1%

Sri Lanka

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Source: Company, NHKS Research

HMSP Quarterly Net Profit |

2016 - 2018

Performance Highlights

HMSP Quarterly Sales by Volume |

2016 - 2018

Source: Company, NHKS Research

HMSP Quarterly Sales |

2016 - 2018

Source: Company, NHKS Research

Source: Company, NHKS Research

Machine-made Clove Cigarettes Sales Growth |

2016 -

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Multiple Valuation

Forward P/E band |

Last 3 Years

Source: NHKS research

Dynamic Forward P/E

band

| Last 3 Years

Source: NHKS research

Rating and target price update

Source: NHKS research, Bloomberg

Target Price Revision

Closing and Target Price

Source: NHKS research

Analyst Coverage Rating

Source: Bloomberg

Date

Rating

Target Price

Last Price

Consensus

vs Last Price

vs Consensus

06/05/2017

Buy

4,620 (Dec 2017)

3,850

4,148

+20.0%

+11.4%

08/07/2017

Hold

3,780 (Dec 2017)

3,470

4,080

+8.9%

-7.4%

11/15/2017

Buy

4,690 (Dec 2018)

4,050

4,144

+15.8%

+13.2%

03/16/2018

Buy

5,025 (Dec 2018)

4,310

4,552

+16.6%

+10.4%

05/31/2018

Buy

4,575 (Dec 2018)

3,850

4,311

+18.8%

+6.1%

NH Korindo Sekuritas Indonesia (NHKS) stock ratings

Period: End of year target price

Rating system based on a stock’s absolute return from the date of publication

Buy

: Greater than +15%

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Summary of Financials

in IDR bn 2016/12A 2017/12A 2018/12E 2019/12E EBITDA/As s ets 39.4% 38.7% 39.3% 40.5%

Sales 95,467 99,091 106,283 113,216 Ca s h Di vi dend (IDR bn) 10,352 12,527 12,442 12,679

EBIT Margin 16.8% 16.2% 15.4% 15.4% Equi ty Ra ti o 80.4% 79.1% 80.1% 79.8%

Depreci a ti on 724 598 643 675 Debt Ra ti o 0.2% 0.3% 0.3% 0.3%

EBITDA 16,745 16,696 16,992 18,064 Fi na nci a l Levera ge 124.4% 126.5% 124.9% 125.3%

EBITDA Margin 17.5% 16.8% 16.0% 16.0% Current Ra ti o 523.4% 527.2% 555.0% 548.2%

Interes t Expens es (22) (9) (10) (11) Qui ck Ra ti o 130.3% 171.2% 170.9% 175.6% in IDR bn 2016/12A 2017/12A 2018/12E 2019/12E 2016/12A 2017/12A 2018/12E 2019/12E Ca s h 5,056 7,502 6,717 7,330 Pri ce /Ea rni ngs 34.9x 43.4x 34.7x 32.6x in IDR bn 2016/12A 2017/12A 2018/12E 2019/12E 2016/12A 2017/12A 2018/12E 2019/12E Net Income 12,762 12,671 12,911 13,718 DCF (IDR bn)

Sprea d (FROE-COE) (%) 28.4% 25.7% 25.4% 26.6%

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