Gudang Garam

[karlmarx]

Indonesian cigarette manufacturers are having a bad year with a slow/non-growing market, and heavier excise tax.

Consequently, stocks like Gudang Garam and Sampoerna (the largest players) have fallen quite sharply to valuations which made me do a double take. But will these cigarette manufacturers see better days? 

Even as the market may have stopped growing, sales may still grow through price inflation. 

But as the cigarette smoking population around the world shrink, and the possibility of ever higher excise tax in Indonesia, this probably isn't a good bet.

https://www.idx.co.id/Portals/0/StaticDa...202020.pdf

https://www.idx.co.id/Portals/0/StaticDa...n-HMSP.pdf

[smalkmus]

Indonesian cigarette manufacturers are having a bad year with a slow/non-growing market, and heavier excise tax.

Consequently, stocks like Gudang Garam and Sampoerna (the largest players) have fallen quite sharply to valuations which made me do a double take. But will these cigarette manufacturers see better days? 

Even as the market may have stopped growing, sales may still grow through price inflation. 

But as the cigarette smoking population around the world shrink, and the possibility of ever higher excise tax in Indonesia, this probably isn't a good bet.

https://www.idx.co.id/Portals/0/StaticDa...202020.pdf

https://www.idx.co.id/Portals/0/StaticDa...n-HMSP.pdf

Used to be from this industry. It's a great business , just not a nice indsutry to work for. You are right on the part that sales will grow thru price inflation and the issue of the market decline. 

One of the ways the insiders assess the market for that year is to look at the decline of the market % vs the pending price increase. Market decline has traditionally been around 2-3% per annum in most market, but the increases in price is ard 3-4%. Taxes sometimes actually benefits the incumbents as a tax increases also means the coy can use that opportunites to add in their own price increases silently without offending the customers (Eg. Australia) , it also deter new players. With a product that is 90% loyalty (no smoker will choose another brand just because it's not availaible at their nearest store, they will prefer to walk 100m to find the next place that sells their fav brand), the stickiness is there. I have been looking at these 2 for a long time as well but with vaping etc, it's a bit more complex for me to assess. 
2 cents worth.

[ongweehiang]

Indonesian cigarette manufacturers are having a bad year with a slow/non-growing market, and heavier excise tax.

Consequently, stocks like Gudang Garam and Sampoerna (the largest players) have fallen quite sharply to valuations which made me do a double take. But will these cigarette manufacturers see better days? 

Even as the market may have stopped growing, sales may still grow through price inflation. 

But as the cigarette smoking population around the world shrink, and the possibility of ever higher excise tax in Indonesia, this probably isn't a good bet.

https://www.idx.co.id/Portals/0/StaticDa...202020.pdf

https://www.idx.co.id/Portals/0/StaticDa...n-HMSP.pdf

Used to be from this industry. It's a great business , just not a nice indsutry to work for. You are right on the part that sales will grow thru price inflation and the issue of the market decline. 

One of the ways the insiders assess the market for that year is to look at the decline of the market % vs the pending price increase. Market decline has traditionally been around 2-3% per annum in most market, but the increases in price is ard 3-4%. Taxes sometimes actually benefits the incumbents as a tax increases also means the coy can use that opportunites to add in their own price increases silently without offending the customers (Eg. Australia) , it also deter new players. With a product that is 90% loyalty (no smoker will choose another brand just because it's not availaible at their nearest store, they will prefer to walk 100m to find the next place that sells their fav brand), the stickiness is there. I have been looking at these 2 for a long time as well but with vaping etc, it's a bit more complex for me to assess. 
2 cents worth.

Bronte Capital - John Hempton did mention about the tobacco industry. I also remembered that he mentioned briefly that the excise duty for Indonesia cigarette maker is done at the gross level which make them not as attractive than the other jurisdiction. 

@smalkmus, do you know if that is correct? 

The gut feel is that the listed parent also offers as much value (Philip Morris International and BAT). If that is the case, then we might as well be taking a position in the parent firm.

====
From https://www.livewiremarkets.com/wires/wh...lue-stocks

Hempton argues that tobacco companies have prospered because regulators have essentially created formidable barriers to entry and allowed the market to consolidate down to a small number of players with outsized market power. Whilst not shying away from the potential risks, the contrarian investor makes the case for the opportunities he believes it presents.

“We have a position in British American Tobacco. Cigarettes margins have gone up and up and up and these margins are supported by the tax regime,” he said. “For years taxes have gone up and this has been surprisingly good for cigarette companies. The reason is that it’s completely supported their margin.”

Further, because regulators want to reduce tobacco consumption, they are actually more than happy for tobacco companies to acquire each other and keep raising prices. Unlike most industries, antitrust concerns are therefore almost non-existent.

And the undervaluation of tobacco stocks over most of the past 30 years has allowed tobacco companies to buy back a lot of their own stock at cheap prices, or pay high dividend yields which investors have been able to reinvest. As Hempton puts it, the industry is dying … but dying slowly and generating bucketloads of cash as it does so.

---
Follow us @ www.weightedresearch.com

or if you wish to receive our most current thoughts on what we are working on, do join our telegram channel at https://t.me/weightedresearch.

[smalkmus]

Indonesian cigarette manufacturers are having a bad year with a slow/non-growing market, and heavier excise tax.

Consequently, stocks like Gudang Garam and Sampoerna (the largest players) have fallen quite sharply to valuations which made me do a double take. But will these cigarette manufacturers see better days? 

Even as the market may have stopped growing, sales may still grow through price inflation. 

But as the cigarette smoking population around the world shrink, and the possibility of ever higher excise tax in Indonesia, this probably isn't a good bet.

https://www.idx.co.id/Portals/0/StaticDa...202020.pdf

https://www.idx.co.id/Portals/0/StaticDa...n-HMSP.pdf

Used to be from this industry. It's a great business , just not a nice indsutry to work for. You are right on the part that sales will grow thru price inflation and the issue of the market decline. 

One of the ways the insiders assess the market for that year is to look at the decline of the market % vs the pending price increase. Market decline has traditionally been around 2-3% per annum in most market, but the increases in price is ard 3-4%. Taxes sometimes actually benefits the incumbents as a tax increases also means the coy can use that opportunites to add in their own price increases silently without offending the customers (Eg. Australia) , it also deter new players. With a product that is 90% loyalty (no smoker will choose another brand just because it's not availaible at their nearest store, they will prefer to walk 100m to find the next place that sells their fav brand), the stickiness is there. I have been looking at these 2 for a long time as well but with vaping etc, it's a bit more complex for me to assess. 
2 cents worth.

Bronte Capital - John Hempton did mention about the tobacco industry. I also remembered that he mentioned briefly that the excise duty for Indonesia cigarette maker is done at the gross level which make them not as attractive than the other jurisdiction. 

@smalkmus, do you know if that is correct? 

The gut feel is that the listed parent also offers as much value (Philip Morris International and BAT). If that is the case, then we might as well be taking a position in the parent firm.

====
From https://www.livewiremarkets.com/wires/wh...lue-stocks

Hempton argues that tobacco companies have prospered because regulators have essentially created formidable barriers to entry and allowed the market to consolidate down to a small number of players with outsized market power. Whilst not shying away from the potential risks, the contrarian investor makes the case for the opportunities he believes it presents.

“We have a position in British American Tobacco. Cigarettes margins have gone up and up and up and these margins are supported by the tax regime,” he said. “For years taxes have gone up and this has been surprisingly good for cigarette companies. The reason is that it’s completely supported their margin.”

Further, because regulators want to reduce tobacco consumption, they are actually more than happy for tobacco companies to acquire each other and keep raising prices. Unlike most industries, antitrust concerns are therefore almost non-existent.

And the undervaluation of tobacco stocks over most of the past 30 years has allowed tobacco companies to buy back a lot of their own stock at cheap prices, or pay high dividend yields which investors have been able to reinvest. As Hempton puts it, the industry is dying … but dying slowly and generating bucketloads of cash as it does so.

---
Follow us @ www.weightedresearch.com

or if you wish to receive our most current thoughts on what we are working on, do join our telegram channel at https://t.me/weightedresearch.

Hi, I am not sure on how the taxes work exactly in Indonesia, so i might have missed out something in that context. Personally, i won't be bothered by it on the impact of the taxes. These guys are ruthless in squeezing that bit of profits in any taxe regime and i was on hand to see it. 

But you might be right the parent companies offers as much value as the parent coy in some cases over a longer run. i am keen on the short run when they might be over sold. I think they might be reaching there for Sampoerna soon.