Gudang Garam: #2 Cigarette Player In Indonesia, The 4th Largest Market Globally

Summary

• Gudang Garam is the #2 cigarette manufacturer in Indonesia with a 29% market share and has >50 years of experience in the market.
• Despite increasingly anti-smoking campaigns globally, prevalence of smoking in Indonesia is the highest in Southeast Asia and the already-large cigarette demand is expected to grow further.
• With its extensive operating history and an extensive distribution network, GGR has market shares of >20% in all major Indonesian regions.
• FCF expected to grow going forward, following completion of expansion plans in the last few years.
• Share price has fallen 20% since July 2016, and GGR currently trades at only 17x LTM PE, <50% of #1 player Sampoerna (38x). We find the significant PE discount attractive.

Company Description

Listed on the Jakarta Stock Exchange and also traded over the US OTC markets (stock - OTCPK:GGNPF; ADR - OTCPK:GDNGY), Gudang Garam (GGR) is the #2 cigarette manufacturer in Indonesia with a 29% market share. Founded in 1958, GGR has >50 years of experience in the Indonesian tobacco industry. The firm started producing traditional hand-rolled kretek (clove cigarettes) and commenced producing machine-made cigarettes (SKM) in 1979. Since 2002, GGR has also started producing light/mild cigarettes (low-tar, low-nicotine) to cater to changing consumer preferences.

GGR is primarily focused on the Indonesian market, with exports constituting only 4.5% of 2015 sales.

The firm has an integrated operation and produces its products from its two facilities in East Java. In addition, the firm owns an in-house facility, manufacturing packaging materials, and has subsidiaries supporting its manufacturing activities.

• Surya Pamenang: Produces packaging paperboard
• Surya Madistrindo: Distributes GGR's products
• Surya Air: Provides non-scheduled air transport services

Company Highlights

Indonesia is the #4 cigarette market globally

With a population of approximately 258 million (of which 68% of adult men are smokers), Indonesia remains one of the largest cigarette markets globally. The industry demand is supported by a large and growing young adult population. As per Oxford Economics, the number of young adult Indonesian will grow at 1.5% CAGR in 2014-19F.

Furthermore, the middle and affluent classes are expected to double to 141 million by 2020 (from 2012) and comprise 53% of the population. Many low-income smokers still purchase cigarettes on a per-stick basis, suggesting further demand growth potential once these smokers upgrade their income and began buying on a per-pack basis.

The high prevalence of smoking is supported by largely affordable prices, at only US$1.30/pack, significantly lower than other Asian countries and it only accounts for 0.8% of monthly private consumption. Supported by a large youth population

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