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April 27, 2011

Sector Overview




Report Origin: Sector Update


Maintaining Total Consumption Amid The Rapid Cigarette Campaign The Fifth Biggest Cigarette Consuming Nations (Annual And Per Person) The Potential Stagnation Of Production Growth In The Future The Second Highest Of Smokers Population In The World Contributed Around 4.8% To World Population Smokers Of 1.3bn New Regulation To Limit Advertising Promotion Should Not Give Significant Impact The Higher Excise Tax Revenue Followed By Higher Consumption Maintaining Total Consumption Amid The Rapid Cigarette Campaign
In the past years, the domestic cigarette industry demonstrated significant growth. Both the production and consumption of the cigarette had improved substantially. Until now, Indonesia remains existed as the fifth biggest top cigarette consuming nations. Data reported in the year of 2005, the total domestic cigarette consumption was around 214bn sticks (FY05) and increased to 220bn sticks a year after. With an uninterrupted advertising promotion and campaign, the number of cigarette consumed continued to increase to 238bn sticks (FY07). Amid the huge concerned of the bad effect of tobacco, people who like smoking seemed to continue enjoying the sensational taste of cigarette. As the additional smokers posted higher figures, at the end of 2008 the total consumption of cigarette up by 2bn sticks to 240bn sticks and reach to 247bn sticks by the end of 2009. Despite the fact that government had attempted to reduce the amount of cigarette consumed by widening the restrictive place for smokers or limiting the advertising content for cigarette producers, we still believe that the amount of cigarette consumed will continue to grow as the consistent rapid promotional marketing activities still take place.

Source : Various Source Compilation

Analyst Email Phone Fax

: Akhmad Nurcahyadi : anurcahyadi@bnisecurities.co.id : (62-21) 25543946 (Hunting) : (62-21) 57935831

Sector Overview - April 27, 2011

The Fifth Biggest Cigarette Consuming Nations Both Annual And Per Person

Comparing the domestic total cigarette consumption with others countries in the world will clearly confirmed that Indonesia is considered as one of the biggest cigarette consuming countries. According to the Tobacco Atlas report taken from WHO (World Health Organization) survey, Indonesia reported that around 239bn sticks of cigarette were consumed by the end of 2007 or around 974 sticks of cigarette consumed per person. United States of America (USA) positioned at the second with around 357bn of sticks cigarette. China with its enormous population leading the figures reported with around 2.163bn of sticks cigarette consumed by the end of that period. Russia following USA with a total of 331bn sticks of cigarette. Japan ranked at the fourth position noted around 259bn sticks of cigarette. The survey also reported per person consumption in that period. The Russian smokers stood at the first position with around 2,319 sticks of cigarette consumed in that year, while Japan following the number, reported around 2,028 sticks of cigarette. China posted around 1,646 sticks of cigarette, while USA and Indonesia placed at the fourth and fifth position with around 1,196 and 974 sticks of cigarette per person, respectively.

Source : Tobacco Atlas, WHO (World Health Organization)

Sector Overview - April 27, 2011

The Potential Stagnation Of Production Growth In The Future

In terms of production, the data also confirmed that the domestic cigarette industry had also experiencing significant volume growth. Started with around 220bn sticks in the year of 2006 the total cigarette produced in Indonesia up to 226bn by the end of 2007. With a consistent improving demand from the domestic market, the production continued to climb to 231bn of sticks (FY08). The increasing amount of cigarette sold in that year coupled with rapid innovation from the producers as well as consistent product differentiation to penetrate new market segmentation had pushed the total number of cigarette produced hiked to 245bn of sticks (FY09). The potential customer of Indonesia cigarette market tied with a low selling price (compared to others regional and global market) of a pack of cigarette and interesting niche market in several region which had also become several positive factors that pushed the production of cigarette at the end of last year to increase in around 250bn sticks (FY10). Nonetheless, as a result of various efforts in the past year to drop down the total amount of cigarette produced and consumed as well as the implementation of several new regulations such as widening the restriction of smoking places (offices, shopping mall, others indoor building and public places, etcetera), especially to reduce the amount of death people caused by cigarette, the GoI (Government Of Indonesia) will limit the total of cigarette produced to around 260bn of sticks at the end of 2015. With around of 250bn sticks of cigarette produced in the year of 2010, with the remaining 10bn of sticks produced in the period of 2011 - 2015, the average production volume growth of cigarette will be around 2bn of sticks per year, or declined more than 50% compared to the FY10 production growth of around 5bn sticks of cigarette or far below the FY09 growth of around 14bn sticks of cigarette. We also view that the limitation of the cigarette production will give significant impact to the industry growth as well. Hence, we continue to maintain our view that in the future year the domestic cigarette industry should not be noted significant growth compared to the historical year growth reported.

Source : Various Source Compilation

Sector Overview - April 27, 2011

The Second Highest Of Smokers Population In The World

Indonesia is not only recorded as one of the biggest cigarette consuming countries. Our country also placed at the second position in terms of percentage population who are smokers. Report published in WHO (World Health Organization) showed that around 28% of Indonesia are a smokers following China with approximately of 29% of its population which are reported as smokers. Russia that placed in first position in terms of cigarette consumed per person, recorded 43% of its population as smokers. Japan which included in the five biggest tobacco consuming nations also posted significant percentage amount of smokers compared to its population. Stood at the second position the report revealed that 38% of Japanese are smokers, meanwhile USA noted the lowest with around 19% of American people are smokers.

Source : Tobacco Atlas, WHO (World Health Organization)

Contributed Around 4.8% To World Population Smokers Of The 1.3bn

Linking the amount of cigarette consumed annually and the percentage amount of population who are smokers to the world smokers should give a clearer picture of how significant our country contribution to the figures of the total world cigarette smokers growth. Such comparison should also confirm the overall condition of the growing domestic smokers' population in the past years. The WHO report on Global Tobacco Epidemic in 2008-2009 showed that out of 1.3bn of world population which 30% of the amount was contributed by China. The other significant contributor countries are Japan, USA and Russia. Noted as one of the biggest cigarette consuming countries, Japan posted around 2.8% to the total amount of world smokers. USA and Russia noted a higher percentage point of around 4.5% and 4.8%, respectively. Despite India that not counted in the report as the fifth leading cigarette consuming nations, it gave around 11.2% to the total of 1.3bn world smokers, or positioned in the second following China. Other countries that reported as the 10 biggest contributor to the amount of world smokers populations were: Brazil, Germany and Turkey with around 1.9%, 1.8% and 1.7%, respectively. The remaining amount of 41.9% was contributed from the rest of the nations that was not stated in the 10 biggest. Indonesia ws sharing the same amount with Russia. In the report our country contributed around 4.8% to the total of world cigarette smoker. 4

Sector Overview - April 27, 2011


Sumber : WHO Report on Global Tobacco Epidemic, 2008

New Regulation To Limit Advertising Promoton Should Not Give Significant Impact

Advertising played an important role in the growing domestic cigarette industry in the past years. At the end of last year, the advertising of cigarette as a total sat at the fourth position amounting around IDR 1.98tn (FY10) following the telecommunication industry with IDR 5.5tn (FY10). Political and social services placed at the second and third with a total material advertised equal to around IDR 2.98tn and IDR 2.38tn, respectively. In that period the total cigarette advertising grew by 14% YoY. To maintain its position and volume growth, the cigarette producers are forecasted to record a total of advertising expenses of around IDR 2.25tn (FY11F) or grew by 13.6% YoY. In the period of 9M10 PT. Gudang Garam, Tbk (GGRM) as one of the domestic biggest cigarette producer with specialized in kretek noted 98% increased of advertising expenses from IDR 504bn (9M09) to around IDR 1tn (9M10). In the company's FY10 report, the total advertising and promotion as percentage of sales increased almost doubled from 2.42% (FY09) to 3.67% (FY10). The increasing expenses used for various rapid promotion program helped GGRM to post a higher sales of 14.31% YoY, while its net profit up by 19.98%. We believe that the continuing promotion should keep the amount of total advertising as a total increase meaningfully. Nonetheless, the potential implementation of government new regulation (UU No. 36/2009) in regards of the limitation of cigarette promotion could slow the total advertising of cigarette this year. However, we still believe that the domestic cigarette industry will continue to record significant growth both in terms of the total consumption and value of the total cigarette sold and would not be significantly influenced by the potential declining total industry cigarette advertising upon the implementation of those new regulation. As a matter of fact, the Indonesia Cigarette Producer Association (GAPPRI-Gabungan Perserikatan Pabrik Rokok Indonesia) targeted the total consumption of cigarette to reach IDR 188tn (FY11F) or grow by around 6.21% YoY compared to the same period of last year of IDR 177tn (FY10).

Sector Overview - April 27, 2011

The Higher Excise Tax Revenue Followed By Higher Consumption

Over the years the GoI had continuously increased the excise tax tariff. As one of the potential sector of government income, started in January 2011 the average increase of excise tax tariff by 6% (Ministry Of Finance Regulation No.190/PMK.011/ 2010 regarding excise tax tariff of tobacco). In spite of the new tariff, we believe that most of the cost will directly pass on to consumers and would not bring significant effect to the total consumption of cigarette. In the past years, despite the increasing value of excise tax revenue and a higher price of a pack of cigarette, the total production of the domestic cigarette industry is continuing to increase. In the past years, most of the FY excise tax revenue were also surpassed the target and projection. For instance, by the end of last year the total excise tax revenue recorded around IDR 62.4tn (FY10) or far above the target of around IDR 59tn. Historically, in the period of FY06-FY10 the total excise tax revenue posted significant growth. In the end of 2007 the excise tax collected amounting IDR 43.8tn or increase by 14% YoY compared to the achievement in FY06 amounting of IDR 34.8tn. Amid the uncertainty of the world global crisis effect that hammered most of the domestic sector growth, the Indonesia cigarette industry continued to post significant growth. At the end of 2008, the total consumption of cigarette growth declined sharply from around 8.18% (FY07) to only around 0.84% (FY08). Yet, the total excise revenue tax noted a higher growth by 2.95% from 14.06% (FY07) to around 17.01% (FY08). In the following year, the amounts of excise tax received continue to increase to IDR 56.7tn or grew by 10.63% YoY (FY09). The historical growth of excise tax revenue clearly showed that regardless of the continuous effort from the government to reduce the number of smokers and to limit the amount of cigarette produced as well as the higher target of excise tax revenue seems unaffecting the number of cigarette consumed in every year. Hence, we deem that the new excise tax tariff should not give significant contraction to the FY11 growth of the sector. The growing population of smokers amid the limitation of smoking places should also become another indication that the cigarette industry will potentially to continue record a higher amount of consumption of cigarette until the end of this year.

Source : Various Source Compilation

Sector Overview - April 27, 2011

Valuation and Recommendation

The consistent development of the domestic cigarette industry in the past years and the continuing acceleration of Indonesia population should become the major catalyst for the industry future growth. The undisrupted promotion and strategy that were implemented by cigarette producers should help the overall sector to continue note significant growth. The constant increase of excise tax revenue attributed to the government income should also become as an indication of the potential growth of the industry in the future. Growing of healthy awareness through rapid campaign from government and others local and international institution are considered as the drawbacks. The campaign could also become a threat to the popularity of light cigarette that offer lower nicotine such as: A-Mild, Avolution, StarMild, Class Mild, LA Light and others mild cigarette products. In response to the consumer demand, producers continue to innovating and rejuvenating its existing products. Up to now, cigarettes continue to become the major contributor for the tobacco industry growth. As one of the potential sectors, the domestic cigarette industry also considered as one of the important contributor for the government income. Expecting to maintain higher excise tax revenue in the future year (through a steady increase of the excise tariff), we view that the government would not make meaningful steps to limiting the industry growth. A constant postponed to sign the Framework Convention Tobacco Control (FCTC) and become the party of FCTC at the same time seems become as an indication that the Indonesia cigarette industry is expected to retain its growth in the future year. The potential increasing price of a pack of cigarette as a result of higher excise tax increase should only give impact to smaller players. Big players such as PT. Gudang Garam (GGRM), PT. Bentoel International (RMBA) and PT. HM Sampoerna (HMSP) should potentially get a minor injury and remain enjoying significant growth amid several efforts from government to limit the industry consistent growth. We also believe that the restriction of smoking places should not be able to push down the number of smokers. The advertising band of cigarette that did not take place seriously also become another reason that had pushed us to have a positive view on the industry growth. A potential of slower volume growth should be potentially balanced by higher revenue as a result of higher price of cigarette. We also believe that the GAPRI target of the total domestic cigarette sales to reach IDR 188tn (FY11F) versus IDR 177tn (FY10) is expected to be achieved by the end of this year. We continue to maintain our NEUTRAL view this year on the Indonesia cigarette industry.

Sector Overview - April 27, 2011 MAIN OFFICE - JAKARTA

Sudirman Plaza, Indofood Tower 16th Floor, Jl. Jend. Sudirman Kav. 76-78 Jakarta 12910, Indonesia Phone: (62-21) 25543946 (Hunting) Fax: (62-21) 57935831 e-mail: bnisec@bnisecurities.co.id (General) Website: http://www.bnisecurities.co.id

JAKARTA - Mangga Dua

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Jl. Buring No. 58 Malang Phone: (62-341) 321214, 321213, 341430 Fax: (62-341) 356876 e-mail: malang@bnisecurities.co.id

JAKARTA - Wisma 46
Wisma BNI 46 Lantai 31 Kota BNI Jl.Jend Sudirman Kav.1 Jakarta 10220 Phone: 021- 2515266 Fax.021-5749837 e-mail: wisma46@bnisecurities.co.id Puri Niaga 3 Blok M8 No. 1B Puri Kembangan, Jakarta Barat Phone: (62-21) 58357464 Fax: (62-21) 58357465 e-mail: puriindah@bnisecurities.co.id

Pertokoan Diponegoro Megah Blok. A5-A6, Lt. 2 Jl. Diponegoro No. 100 Denpasar - Bali Phone: (62-361) 264376 Fax: (62-361) 229170 e-mail: denpasar@bnisecurities.co.id

JAKARTA - Puri Indah

Jl. Pemuda No. 12 Phone: (62-61) 4579616 Fax: (62-61) 4579656 e-mail: medan@bnisecurities.co.id

Jl. Jend. Sudirman No. 132, Kotak Pos 165 PLG Phone: (62-711) 3619662 Fax: (62-711) 3619663 e-mail: plb@bnisecurities.co.id

Jl. Perintis Kemerdekaan No. 3 Phone: (62-22) 4213375 Fax: (62-22) 4213376 e-mail: bdg_pk@bnisecurities.co.id

BNI Cabang Pasar Pusat Jl.Jend Sudirman No.365 Pekanbaru 28282 Phone: (62-761) 46757, 839698 Fax: (62-761) 856279 e-mail: pekanbaru@bnisecurities.co.id SEMARANG Thamrin Square Blok B5 Jl.MH Thamrin No.5 Semarang Phone: (62-24) 3566414-5, 64126413-7 Fax: (62-24) 3581713 e-mail: bnissmg@bnisecurities.co.id ACEH Jl.KH Akhmad Dahlan No.111 Lt.2 Banda Aceh Phone: (62-651) 31109 Fax: (62-651) 31107

Gedung BNI, Jl. Laksda Adi Sucipto No.137 Phone: (62-274) 581001 Fax: (62-274) 584023 e-mail: yogya@bnisecurities.co.id

Jl. Slamet Riyadi No. 348 Phone: (62-271) 729667 Fax: (62-271) 729668 e-mail: solo@bnisecurities.co.id

Jl. Pemuda No. 36 Phone: (62-31) 5320912 Fax: (62-31) 5318425 e-mail: surabaya@bnisecurities.co.id

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