GG-Credit Suisse

Equity Research Asia Pacific / Indonesia
Tobacco
23 April 2015
Gudang Garam (GGRM.JK)

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Looking through the smoke

In the right spot. A mix of strong brand name, pricing power, product mix, and
volume growth in a tough environment makes GG a strong contender in the
Indonesian consumer space, while its costs and revenues are almost entirely
rupiah based, making it immune to the currency volatility. The fact that the stock
has fallen 13% YTD and underperformed the market by 17% makes it an
attractive investment opportunity. Upgrade to OUTPERFORM (from Neutral).
Worries discounted; offers a buying opportunity. The market has
overreacted to the potential excise tax hike and higher VAT. If this happens,
we believe that GG has the ability to pass these through, as it has
consistently done in the past.
Turning cash flow positive. The favourable product mix in favour of
machine-made cigarettes should boost margins. Further, lower raw material
costs, and lower employee costs should provide a fillip to GG's profitability.
This improved profitability coupled with completed expansions resulting in
lower capex is turning GG free cash flow positive starting this year.
Upgrade TP to Rp66,800. Our valuation puts GG firmly below its peers
globally and within Indonesia's consumer space, with higher growth rate
(17% CAGR over 2015E-17E). GG has traded at a relative P/E of 1.25x
over the past five years which gives us a target P/E of 20x, similar to the
weighted average valuation of global peers. Currently it is trading 1 std. dev.
below this five-year average. Our new TP of Rp 66,800 implies a 26%
upside from current levels.
GG has an undemanding valuation, and it is trading at a discount to its fiveyear historical average relative P/E
1.8
1.7
1.6
1.5
1.4
1.3
Avg (2010-15): 1.25
1.2
1.1
1.0
0.9
0.8
Apr-10
Apr-11
Rel PE
Apr-12
Avg Rel PE
Apr-13
STDEV +1
Apr-14
Apr-15
STDEV -1
Source: Company data, Bloomberg

Bbg/RIC
GGRM IJ / GGRM.JK Price (22 Apr 15 , Rp)
53,100
Rating (prev. rating)
O (N) TP (prev. TP Rp)
66,800 (53,500)
Shares outstanding (mn)
1,924.09 Est. pot. % chg. to TP
26
Daily trad vol - 6m avg (mn)
0.9 52-wk range (Rp)
63700.0 - 48100.0
Daily trad val - 6m avg (US$ mn)
3.7 Mkt cap (Rp/US$ bn)
102,169.1/ 7.9
Free float (%)
23.6 Performance
1M
3M
12M
Major shareholders Suryaduta Investama Absolute (%)
4.8
(9.2)
1.1
(69.29%) Relative (%)
4.9 (11.4) (10.2)
Year
12/13A
12/14A
12/15E
12/16E
12/17E
Revenue (Rp bn)
55,437
65,186
74,518
83,340
93,440
EBITDA (Rp bn)
7,721
10,018
11,854
13,243
15,117
Net profit (Rp bn)
4,329
5,369
6,423
7,398
8,798
EPS (Rp)
2,250
2,790
3,338
3,845
4,573
- Change from prev. EPS (%)
n.a.
n.a.
7
6
12
- Consensus EPS (Rp)
n.a.
n.a.
3,086
3,542
3,915
EPS growth (%)
7.8
24.0
19.6
15.2
18.9
P/E (x)
23.6
19.0
15.9
13.8
11.6
Dividend yield (%)
1.5
1.5
2.0
2.4
2.8
EV/EBITDA (x)
14.7
11.9
10.1
8.9
7.7
P/B (x)
3.5
3.1
2.7
2.4
2.1
ROE (%)
15.5
17.2
18.2
18.5
19.4
Net debt(cash)/equity (%)
39.3
49.8
46.3
36.3
29.6
Note 1: Gudang Garam is Indonesia's leading tobacco company. It produces the full range of kretek
cigarettes including hand-made (SKT) and machine-made (SKM) cigarettes, both in full flavoured
and low-tar, low-nicotine, under brands such as GG Merah, GG Surya and GG FI.
RESEARCH ANALYSTS
Ella Nusantoro
62 21 255 37917
ella.nusantoro@credit-suisse.com
DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure:
Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of
this report. Investors should consider this report as only a single factor in making their investment decision.
CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS
BEYOND INFORMATION
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Focus charts
856
700
90%
600
30%
20%
640
9%
590
537
500
10%
400
0%
2010
2011
2012
2013
SKM
2014
2015E
2016E
25%
8%
20%
7%
15%
6%
2010
2017E
30%
2011
2012
2013
2014
ASP (Rp/stick)
SKT
2015E 2016E 2017E

YoY growth (%)
FIM 12
Surya 16
Pro Mild 16
GG Mild 16
1Q15
90%
Apr-15
90%
90%
88%
4Q14
84%
40%
3Q14
40%
84%
45%
10%
706
83%
12%
35%
60%
50%
50%
11%
793
800
13%
2Q14
70%
910
1Q14
900
80%
972
CAGR 10-14: 10.2%

CAGR 15E-17E: 6.6%
4Q13
1000
10%
3Q13
10%
2Q13
10%
10%
12%
1Q13
16%
4Q12
16%
3Q12
90%
17%
Figure 3: with margins by products seen improving
2Q12
100%
Figure 2: and it has pricing power
1Q12
Figure 1: GG has the preferred mix of machine-made from

hand-rolled
Merah 12
Source: Company data, Credit Suisse estimates
Figure 4: Lower cost and opex resulting in operating

margins improving
Figure 5: The capex ending
Figure 6: leading to positive FCF this year onwards
2400
6000
20%
5429
19%
2200
4000
14%
13%
1400
12%
1200
11%
1000
2000
3000
2911
3000
2000
2000
2000
Operating profit (Rp bn)
Operating margin (%)
IDEAS ENGINE
1648
1004
1000
52
0
-1000
1646
1183
-2000
1000
10%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
(in Rp bn)
1600
(in Rp bn)
16%
15%
3599
3000
17%
1800
4199
4000
5000
18%
2000
5000
5625
-2035
-3000
0
2010
2011
2012
2013
2014
2015E 2016E 2017E
-4000
2010
2011
2012
-3336
-3378
2013
2014
2015E 2016E 2017E
Looking through the smoke

In the right spot
Upgrade TP to Rp66,800
Consumers are switching to machine-made kretek cigarettes (SKM) from hand-rolled cigarettes
(SKT) due to their aging profile and higher clove prices (impacting SKT more than SKM). This
benefits Gudang Garam (GG), as 90% of its products are SKM-based. The shift to SKM,
particularly SKM FF (fully flavoured) is in line with the results of Credit Suisse's Indonesia
Consumer Survey 2015, where smokers said they continued to prefer SKM to SKT.
Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which is
below -1 std dev. In our view this is not warranted given the company's improving performance.
We upgrade our rating to OUTPERFORM with a target price of Rp66,800/share (up from
Rp53,500/share), implying a 20x 2015E P/E, which is equal to its average historical relative
P/E of 20x. This valuation is also similar to the weighted average of forward earnings of
cigarette companies globally, whose earnings are lower than GG's. GG's earnings are
estimated to witness a 17% CAGR over 2015E-17E. Compared with the other consumer
companies in Indonesia, which on average trade at about 30-35x forward earnings, we believe
GG's valuation is warranted, given that its revenue and costs are mostly IDR-based, and thus
immune to the fluctuation in exchange rates.
We expect GG to continue to gain market share in machine-rolled cigarettes (SKM). We are

looking at GG to have a 5% volume growth on 7% higher ASP over the next two years, with the
market share in 2014 estimated to have been at about 23%. We believe that these assumptions
are higher than what the consensus is building into the valuations. GG has demonstrated its
ability to pass on prices, with its ASP witnessing a 10% CAGR in the last four years, and despite
the tough environment, its volume still witnessed a 4% CAGR during the period.
Worries discounted; offers a buying opportunity

The market has overreacted, in our view, on the potential excise tax hike and higher VAT, as
the parliament approved the 2015 Government of Indonesia (GoI) budget revisions in February.
The GoI is seeking a 24% YoY growth in excise tax revenue, or about 10% of the total
targeted tax revenue of Rp1,489.3 tn. Even though there is no clarity thus far on how the new
target will be achieved, the GoI stated that the increase will come from: (1) clamping down on
illegal cigarettes, and (2) a better tax collection mechanism.
If the increase happens, we believe that GG has the ability to pass these through, as it has
consistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to
10% (from the current 8.4%) and an excise duty hike to 5% will require price increases of 5%
and 8%, respectively, to maintain profitability, assuming other things remain similar.
Turning cash flow positive

We have adjusted our estimates on GG by about 7% for this year and next, on the back of
higher margins that result from a better product mix as well as its ability to increase prices, and
as clove prices remain stable. GG also has lower employee costs thanks to its product mix. At
the same time, capex is expected to decline as it completes its three-year expansion
programme. Free cash flow is turning positive starting this year, with an improving net margin.
IDEAS ENGINE

Price (22-Apr-15,Rp)
Market Cap (Rpmn)
Rating
Target Price (Rp)
EPS FY1E (Rp)
EPS FY2E (Rp)
EPS FY3E (Rp)
Source: Credit Suisse Estimates, IBES
Income Statement
Sales revenue
Cost of goods sold
SG & A
Other operating exp./(inc.)
EBITDA
Depreciation & amortisation
EBIT
Net interest expense/(inc.)
Recurring PBT
Taxes
Profit after tax
Minority interests
Reported net profit
Net profit (Credit Suisse)
Cash Flow
EBIT
Net interest
Tax paid
Working capital
Other cash & non-cash items
Operating cash flow
Capex
Free cash flow to the firm
Other investment/(outflows)
Investing cash flow
Dividends paid
Net borrowings
Financing cash flow
Total cash flow
Net change in cash
Balance Sheet
Cash & cash equivalents
Current receivables
Inventories
Other current assets
Current assets
Property, plant & equip.
Other non-current assets
Total assets
Accounts payable
Short-term debt
Current provisions
Other current liabilities
Current liabilities
IDEAS ENGINE
53100.0
102169072.8
Current Value
OUTPERFORM
66800.00
3338.06
3845.00
4572.56
Previous Value
NEUTRAL
53500.00
3131.88
3610.66
4073.42
2014FYA
65,186
51,806
4,855
-1,493
10,018
1,440
8,578
1,372
7,206
1,811
5,395
27
5,369
5,369
2014FYA
8,578
-1,372
-1,811
-5,224
42
213
-5,625
-5,412
662
-4,963
-1,539
5,101
3,562
-1,188
-1,188
2014FYA
1,588
1,532
34,739
673
38,533
18,973
715
58,221
989
18,147
166
4,480
23,783
2015FYE
74,518
58,625
5,679
-1,640
11,854
1,640
10,214
1,608
8,606
2,151
6,454
32
6,423
6,423
2015FYE
10,214
-1,608
-2,151
-4,696
1
1,760
-3,000
-1,240
637
-2,363
-2,040
1,046
-994
-1,597
-1,597
2015FYE
1,599
1,943
39,783
663
43,988
20,333
78
64,399
1,168
19,000
198
5,019
25,385
2016FYE
83,340
65,472
6,399
-1,774
13,243
1,774
11,470
1,557
9,913
2,478
7,435
37
7,398
7,398
2016FYE
11,470
-1,557
-2,478
-2,961
181
4,655
-2,000
2,655
-12
-2,012
-2,441
-1,789
-4,230
-1,587
-1,587
2016FYE
1,568
2,275
42,913
742
47,498
20,559
90
68,147
1,214
17,000
228
5,523
23,964
2017FYE
93,440
72,992
7,238
-1,907
15,117
1,907
13,210
1,421
11,789
2,947
8,842
44
8,798
8,798
2017FYE
13,210
-1,421
-2,947
-5,090
442
4,194
-2,000
2,194
-17
-2,017
-2,811
-741
-3,552
-1,375
-1,375
2017FYE
1,615
2,652
48,179
832
53,278
20,652
107
74,037
1,273
16,000
271
6,065
23,609
Non-current provisions
Total liabilities
Shareholders' equity
Minority interests
Total liabilities & equity
Per Share
Shares (wtd avg.) (mn)
EPS (Credit Suisse) (Rp)
DPS (Rp)
BVPS (Rp)
Operating CFPS (Rp)
Earnings
Sales revenue
EBIT
Net profit
EPS
EBITDA
EBIT
Pre-tax profit
Net profit
Valuation
P/E
P/B
Dividend yield (%)
P/CF
EV/sales
EV/EBITDA
EV/EBIT
Returns
ROE
ROIC
Asset turnover (x)
Interest burden (x)
Tax burden (x)
Financial leverage (x)
Gearing
Net debt/equity (%)
Net debt/EBITDA (x)
Interest cover (x)
1,209
24,992
33,093
135
58,221
2014FYA
1,924
2,790
800.00
17,199
110.75
2014FYA
17.6
28.2
24.0
24.0
15.4
13.2
11.1
8.2
2014FYA
19.0
3.1
1.5
479.4
1.8
11.9
13.8
2014FYA
17.2
14.1
1.1
0.8
0.7
1.8
2014FYA
49.8
1.65
6.25
1,402
1,613
1,873
26,787
25,578
25,481
37,476
42,433
48,420
135
135
135
64,399
68,147
74,037
2015FYE
2016FYE
2017FYE
1,924
1,924
1,924
3,338
3,845
4,573
1,060
1,268
1,461
19,477
22,054
25,165
914.58
2,419
2,180
2015FYE
2016FYE
2017FYE
14.3
11.8
12.1
19.1
12.3
15.2
19.6
15.2
18.9
19.6
15.2
18.9
15.9
15.9
16.2
13.7
13.8
14.1
11.5
11.9
12.6
8.6
8.9
9.4
2015FYE
2016FYE
2017FYE
15.9
13.8
11.6
2.7
2.4
2.1
2.0
2.4
2.8
58.1
22.0
24.4
1.6
1.4
1.2
10.1
8.9
7.7
11.7
10.3
8.8
2015FYE
2016FYE
2017FYE
18.2
18.5
19.4
14.6
15.2
16.4
1.2
1.2
1.3
0.8
0.9
0.9
0.8
0.7
0.8
1.7
1.6
1.5
2015FYE
2016FYE
2017FYE
46.3
36.3
29.6
1.47
1.17
0.95
6.35
7.37
9.29
Source: Company data, Credit Suisse Estimates
In the right spot

Consumers favouring SKM fully flavoured
Last year, GG saw its volume increase 5% YoY to 80bn sticks, whilst the industry, as reported
by Nielsen, saw volume decline 0.8% YoY to 349bn sticks. Thus, GG is estimated to have had
a market share of 23% in 2014, up from 21% in the previous year. The decline in the industry
volume has mostly been due to SKT (hand-rolled kretek cigarettes) products, comprising only
10% of GG's total volume, and down 14% YoY.
On the other hand, the industry volume for SKM FF (machine made fully flavoured kretek
cigarettes) was up 6% YoY and SKM low-tar, low-nicotine (LTLN) was up 3% YoY. GG is on
the right spot, with a majority (90% of total volume) of its products being SKM-based. Its SKM
FF (accounts for 76% of total volume) saw a 6% YoY volume growth last year, and SKM LTLN
grew 14% YoY (accounting for 14% of total), despite its SKT products declining 12% YoY.
We estimate a 5% volume growth over the next two years.
In 1Q15, Philip Morris International's (PM.N, US$84.98, NEUTRAL, TP US$80) 1Q15
earnings release stated that the volume for Indonesia's cigarette industry grew 5.9% YoY to
78bn, even though PMI views that the quarterly figures are volatile, thus only expecting a 2%
increase YoY this year. Volume for SKT still declined 1.7% YoY (accounting for 19% of total
volume), while volume for SKM grew 2% YoY (accounting for 75% of total volume). GG has
yet to release its 1Q15 earnings, which is expected by the end of the month.
Figure 7: GG volume vs volume growth
YoY
100
94
95
90
90
80
80
77
73
75
70
68
100%
6%
90%
69
60%
3%
50%
40%
20%
60
0%
10%
2012
2013
Sales vol (bn sticks)
2014
2015E
2016E
2017E
YoY growth (%)
16%
16%
12%
10%
10%
10%
10%
83%
84%
84%
88%
90%
90%
90%
90%
2010
2011
2012
2014
2015E
2016E
2017E
30%
1%
2011
17%
70%
65
2010
0%
2013
SKM
IDEAS ENGINE
By age group, the younger generations preferred SKM LTLN or white cigarettes, while the
older generations preferred SKT, and SKM FF is favoured by all age groups. Of our
respondents in the age group below 30, 36% are fans of SKM LTLN, as compared to 32%
preferring SKM FF and 14% liking SKT products.
80%
4%
2%
In our survey, of the total, 33% of smokers preferred SKM FF (32% in last year's survey).
Those that favoured SKM LTLN were down to 28%, from 30%, and SKT smokers are now at
22% (versus 24% in the 2013 survey)the lowest in the five years we have done the survey.
This was underpinned by higher clove prices, which led to higher price increases in SKT. We
also think that the aging profile that SKT has, might have resulted in a shift towards the
younger profile that preferred SKM. White cigarettes (SPM) continue to be the least popular
type, only favoured by 6% of respondentsrelatively stable from our previous survey.
Interestingly, higher and lower income earners prefer SKM FF more compared to other types,
while middle income earners prefer SKM LTLN and SKT.
Figure 8: GG volume composition
7%
5%
85
85
The shift to SKM FF is in line with the results of Credit Suisse's Indonesia Consumer Survey
2015. The smokers continue to prefer SKM to SKT, and SKM FF is the leading choice
compared with SKM LTLN. (Please refer to our report "Indonesia Consumer Survey 2015:
Welcome to the fast lane..." published 9 February 2015)
SKT
Figure 9: Credit Suisse Indonesia Consumer Survey - cigarette consumption by cigarette

types
Age
Monthly income
% of
Total Urban Rural Java Non 18-29 30-45 46-55 56-65 <Rp1.5mn Rp1.5- >Rp7.5mn
respondents
Java
7.5mn
2014
SKM FF
SKM LTLN
SKT
White
Others
2013
SKM FF
SKM LTLN
SKT
White
Others
2012
SKM FF
SKM LTLN
SKT
White
Others
2011
33
28
22
6
12
34
31
20
7
8
32
22
24
5
17
36
24
25
7
7
27
38
8
7
20
32
36
14
9
9
36
25
21
4
13
32
15
33
5
15
29
17
33
4
17
37
18
27
10
8
12
30
35
8
15
72
5
13
3
7
32
30
24
6
7
31
28
23
8
9
36
30
24
2
7
34
29
24
7
6
28
7
40
5
19
35
37
11
9
9
28
25
28
6
13
33
13
41
4
9
43
13
33
0
11
35
28
23
2
12
21
26
34
9
9
87
4
6
1
3
31
23
26
7
14
28
28
26
9
8
34
17
25
6
18
34
30
22
10
5
28
16
27
7
22
30
32
17
13
8
32
24
29
8
7
34
8
36
3
18
25
3
51
3
19
33
29
19
3
16
18
31
28
11
11
85
4
6
3
2
SKM FF
SKM LTLN
SKT
White
Others
2010
SKM FF
SKM LTLN
SKT
White
Others
31
25
30
5
10
32
27
24
7
10
30
19
36
1
13
34
36
19
4
6
27
12
35
7
19
27
35
22
6
10
33
22
31
6
9
35
7
41
3
14
38
8
30
4
20
31
33
17
3
15
25
32
29
6
8
92
3
2
1
2
39
23
27
4
7
38
26
28
5
4
41
13
30
2
14
41
33
17
4
5
34
14
37
3
11
37
33
20
4
6
40
18
32
5
5
41
6
33
6
14
29
10
45
0
15
42
29
17
3
9
27
34
29
6
4
96
1
2
1
1
Pricing power is seen...

GG has increased its ex-factory prices thrice this year, with the last increase being on 13 April.
The increase has been due to the excise tax hike, which became effective 1 Jan 2015. Unlike
in other countries, cigarette producers in Indonesia have been unable to pass through the
increase in excise tax immediately, instead choosing to implement it gradually. This is because
cigarette in Indonesia, at the street level, is still mostly sold by sticks instead of by packs, which
we view is due to consumers' weak buying power.
Excise cost and VAT accounted for 68% of GG's total cost last year. The new excise tax
increase is 5.5% for SKT (hand-rolled cigarettes) and 10.7% for SKM (machine-made
cigarettes) for Tier 1 producers (those that produce more than 2bn sticks a year). Excise cost
for SKT is now at Rp319/stick and Rp457/stick for SKT, inclusive of the 10% regional tax. In
addition to that, the GoI also charges an 8.4% on VAT costs on the banderole prices.
Figure 10: Indonesia's latest excise tax scheme, effective on 1 January 2015*
Type
Tier
Annual
output
(sticks)
(Rp/stick)
Old
New
SKM
> 2 bn
Above Rp800
669
800
19.6% 375 415 10.7%
(Machine-made,
kretek cig)
II
< 2 bn
Above Rp588
549
588
7.1% 285 305 7.0%
440-549 511-588
7.1%- 245 265 8.2%

16.1%
Below Rp588,
min at Rp511
Chg Old New
Chg
> 2 bn
Below at Rp820
680
820
20.6% 380 425 11.8%
(Machine-made,
white cig)
II
< 2 bn
Above Rp520
444
520
17.1% 245 270 10.2%
Below Rp425,
min at Rp520
I
(Hand-rolled,
kretek cig)
II
IIIA
nicotine kretek cigarettes, and SKT is hand-rolled kretek cigarettes.

Source: Credit Suisse Indonesia Consumer Survey 2015
Tax/stick (Rp)
SPM
SKT
* Note: SKM FF is machine-made full-flavored kretek cigarettes, SKM LTLN is machine-made low-tar, low-
MRP (Minimum Retail Price)
IIIB
> 2 bn
Above Rp825
Below Rp825,
min at Rp606
350 mn - 2 Above Rp379
bn
Rp385-Rp417
345-444 425-520 17.1%- 195 220 12.8%

23.2%
749
825
10.1% 275 290 5.5%
550-749 606-825 10.1%- 205 220 7.3%

10.2%
379
417 10.0% 130 140 7.7%
349-379 385-417 10.0%- 120 125 4.2%

10.3%
50 mn - 350 Min price at Rp286
250
286 14.4% 80 85 6.3%
mn
< 50 mn Min price at Rp286
286
n/a
80
n/a
* Based on Ministry of Finance Decree No. 205/PMK.011/2014, effective on 1 Jan 15.

Source: Ministry of Finance.
IDEAS ENGINE
Overall, GG has increased its average price by about 3-6% YTD, depending on the product. By
comparison, last year, GG increased its prices an average 10-16%, depending on the product.
Thus its blended ASP last year increased 12% YoY to Rp793/stick, of which there was a 12%
increase in SKM products (Rp813/stick) and a 9% increase in SKT products (Rp602/stick).
We estimate a blended ASP increase of 8% this year, on 6% higher volume growth YoY.
Interestingly, not many know that, since 2008 GG's cigarette prices have been rising higher
than that of Indofood's noodle prices (post the end of price war). GG's blended ASP increased
at a 10% CAGR over 2008-14, with SKM increasing 10% and SKT 9%, while Indofood's
noodle prices increased 8% during this period.
Figure 11: Prices have been rising
1000
900
Figure 12: to keep up with the tax

increase
972
CAGR 10-14: 10.2%

CAGR 15E-17E: 6.6%
910
12%
856
11%
793
800
10%
706
700
600
13%
640
9%
590
537
8%
776
800
750
CAGR 10-14: 11.0%

CAGR 15E-17E: 6.2%
700
14%
582
600
12%
544
550
500
450
16%
688
644
650
10%
463
425
8%
400
500
7%
400
6%
2010
2011
2012
2013
2014
ASP (Rp/stick)
6%
350
300
4%
2010
2015E 2016E 2017E
2011
2012
2013
2014
2015E 2016E 2017E
Tax cost/stick (Rp)
YoY growth (%)
YoY growth (%)
Figure 13: GG ASP comparables noodles

vs cigarettes (in value)
Figure 14: GG ASP comparables

noodles vs cigarettes (YoY growth)
1800
45%
CAGR 08-14
Noodles: 8%, GG-SKM: 10%,
GG-SKT: 9%
1600
18%
730
40%
1400
35%
1200
30%
1000
25%
800
20%
600
15%
400
10%
200
5%
0%
2008
2009
Noodles (Rp/pack)
2010
2011
GG - SKM (Rp/stick)
2012
2013
2014
GG - SKT (Rp/stick)
Source: Gudang Garam, Indofood, CS estimates
IDEAS ENGINE
2008
2009
Noodles (Rp/pack)
2010
2011
GG - SKM (Rp/stick)
2012
2013
2014
GG - SKT (Rp/stick)
Source: Gudang Garam, Indofood, CS estimates
Worries discounted; offers a buying opportunity

The parliament has approved the 2015 Government of Indonesia (GoI) budget revisions at the
end of February 2015, with a new revised target of excise tax of Rp145.7tn, or 24% higher
YoY (2014: Rp117.45tn). The amount is around 10% of the total targeted tax revenue of
Rp1489.3 tn.
Though there is no clarity thus far on how the new target will be achieved, the GoI stated that
the increase will come from: (1) illegal cigarettes, and (2) a better tax collections mechanism, in
addition to the expected volume growth and revenue from the new duty that has been
implemented since the beginning of the year.
We are sceptical that the GoI will be able to get revenue from illegal cigarettes given that 90%
of cigarettes sold in Indonesia are kretek, which are only produced in Indonesia, and illegal
cigarettes are mostly home-based industry for SKT products.
On tax collections, on the other hand, it is still possible to ask producers to pay in cash for
banderole purchases instead of providing a two-month credit. This might add around Rp10-15
tn in additional revenue to the GoI book. However, if this happens, it will disrupt the cash flow
of the cigarette producers for the month, unless it can be done through instalments.
Alternatively, the easiest way is to further increase the excise tax, even though that will hurt
volumes.
Figure 15: Gol excise tax revenue target
33%
146
140
120
23%
95
100
60
23
14% 45
38
25%
24%
20%
51
66
16%
14%
15%
11%
8%
20
12%
11%
10% 10%
10%
10%
10%
9%
9% 9%
9% 9%
9%
10%
9%
IDEAS ENGINE
1.2%
9%
1.1%
8%
8%
1.0%
% excise to total tax revenue
2014
2015E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
0.9%
2002
2014
2015E
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
5%
Source: Ministry of Finance
1.3%
10%
YoY growth (%)
India's cigarette sector has been underperforming the Indian market by 26% in the past one
year, as the government has been implementing stricter measures on the sector, by increasing
the cigarette tax by over 35% within a span of ten months, and considering putting restrictions
on sale of loose sticks of cigarettes. The Indian government has been looking to promoting
public health by cutting down on smokers. The fear of that the happenings in India could get
replicated in Indonesia could have been behind the weakness Gudang Garam's shares. The
investors might have shied away as the GoI is targetting a higher revenue from excise tax.
Nonetheless, in our view, the difference is that in India, excise tax revenue only accounts for
~1% of total tax revenue, while in Indonesia, it accounts for about 10%. The GoI is looking to
increase tax, and not limiting the cigarette volume. Cigarette sale in India is around 100bn, a
third of what is sold in Indonesia.
1.4%
10%
7%
Excise tax revenue (Rp tn)
Indonesia vs India Why is it different?
1.5%
11%
11%
2001
40
11%
33
26 29
57
35%
30%
117
77
18%
80
108
If the increase happens, we believe that GG has the ability to pass these through, as it has
consistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to
10% (from current 8.4%) and an excise duty rise to 5% will require price increases of 5% and
8%, respectively, to maintain profitability, assuming other things remain similar.
Figure 16: Excise tax to total revenue and to

GDP
2000
160
Sensitivity analysis on the excise tax and VAT increase
% excise to GDP
Source: Ministry of Finance
Turning cash flow positive

GG has a better net revenue margin now
With the better product mix (higher proportion on SKM FF) and price increases, GG's blended
net revenue margin (NRM) improved. NRM is calculated based on the revenue derived from
deducting the excise and VAT costs. As of April 2015, GG's SKT (GG Merah) has an NRM of
46.8%, and its SKM FF (GG FIM 45.1% and GG Surya at 43.7%), while the NRM for SKM
LTLN (GG Mild 28% and GG Pro Mild 18.5%) is still half of that of SKM FF, and they are
improving. This is compared to the end of 1Q14, of 42.8% for SKT, 44.4% for GG FIM and
43.8% for GG Surya (flat), while for SKM LTLN products, improvement is seen in GG Mild,
from 23.2%, while Pro Mild is still lower at 18.5%.
There is no index available for the movement of clove prices as the planting and usage of clove
is mostly in Indonesia. Clove prices increased from Rp50K/kg in 2010 to Rp120K/kg in 2011,
and peaked at Rp220/kg in 2012. In 2013 and 2014, clove prices came down and it sold at
about Rp140K/kg to Rp160K/kg. It has currently stabilised at about Rp130K/kg to
Rp140K/kg. Both clove and tobacco and other ingredients, accounted for about 27% of GG's
total costs in 2014 (up from 23% in 2010). We estimate raw materials costs to account for
about 26% of total costs going forward. Note that clove and tobacco are purchased from the
farmers and have to be aged first, between three months to eighteen months, depending on
the quality, before they can be of use.
Coupled with the ability to gradually increase its pricing, GG's gross margin is expected to
improve from its lowest at 15.8% in 2007, to 20.5% in 2014. We estimating gross margin to
be at around 21-22% going forward. Gross profit is estimated to grow at 14% CAGR 15E17E, from 11% CAGR 10-14.
Figure 17: Net revenue of GG cigarettes
Figure 19: GG cost breakdown
25%
30%
2000
20%
20%
1000
15%
10%
FIM 12
Surya 16
Merah 12
Pro Mild 16
1Q15
GG Mild 16
Source: Company data
Apr-15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q12
3Q12
2Q12
1Q12
FIM 12
Surya 16
Pro Mild 16
GG Mild 16
1Q15
3000
Apr-15
40%
4Q14
50%
30%
3Q14
35%
4000
2Q14
5000
1Q14
60%
4Q13
40%
3Q13
6000
2Q13
70%
1Q13
45%
4Q12
7000
3Q12
80%
2Q12
50%
Merah 12
Helped by the stable clove price as well
Figure 20: GG gross profit vs gross margin

25000
25%
20449
20000
24%
17824
23%
15755
(in Rp bn)
Figure 18: Net revenue margin of GG cigarettes
8000
1Q12
(in Rp/stick)
In 1Q15, NRM is seen declining due to the rise in the excise tax, of which GG has yet to fully
passed on to the consumers, nevertheless, as seen historically, NRM will catch up in the
following quarters.
15000
10000
13380
8866
10129
22%
10874
21%
9185
20%
5000
19%
0%
-10%
2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E
0
Raw materials
Indirect production costs
Cost of other sales
Direct labor
Excise duty & VAT
Others
18%
2010
2011
2012
2013
Gross profit (Rp bn)
2014 2015E 2016E 2017E

Gross margin (%)
We have seen clove prices (the main raw material for kretek cigarettes and mostly grown in
Indonesia) rise over the last three years, due mainly to poor harvest. This has resulted in at least
three events that changed the industry's dynamic: (1) decline in margins as clove prices
increased, (2) decline in consumption of SKT cigarettes as SKT used more clove than SKM,
thus becoming more expensive, (3) plently of small-sized SKT producers (such as home-based
industry) closing down. In all, as a result, smokers switched to SKM FF products, among other
reason, as well as the aging profile of the SKT cigarettes.
IDEAS ENGINE
The largest part of GG's opex comprises transportation, freight, and advertising-related costs.
The company does not provide a detailed break-up on these three items. In 2013, with the
launch of its SKM LTLN (GG Pro Mild and GG Mild), GG started a more aggressive campaign,
which pushed up its advertising costs. The company combined its transportation, freight, and
advertising costs together, which accounted for 37% of opex, or 3% of its total revenue in
2013. In 2014, with no new significant product launch, and as it was an election period, its
marketing campagin slowed down, leading to its advertising costs declining 14% YoY, or 2% of
its total revenue (28% of total opex). We expect the company's advertising events to be more
aggressive this year, as such, we assume the transportation, freight, and advertising costs to
account for 2.7% of total revenue this year, or up 50% YoY, and increase to 3% going
forward. We've also taken into consideration the rise in fuel prices (which has been increased
twice as of Apr 15).
GG booked a one-off charge on employee compensation due to an early retirement
programme, amounting to ~Rp500 bn in FY14. This was the result of weak demand for SKT
products, which is more labour intensive, while SKM products are continuing to grow. Its
number of employees were down 16% YoY at 36,456 at the end of 2014. As such, GG's
employee compensation increased 49% YoY in FY14, accounting for 37% of its total opex
(2.7% of total sales), as compared to 28% of total opex, or 2.2% of its total sales in FY13. We
expect employee compensation to decline 10% this year and account for 2.2% of its revenue
or 29% of its opex.
As its gross margin improves, GG's operating margin also improved to 13.2% in 2014, from
12% in 2013, but is yet to reach 16.3% seen in 2011 (its lowest was 8.3% in 2006). We are
expecting the operating margin to be at 13.6% this year with the operating profit expected to
witness a 14% CAGR over 2015-17E, from a 10% CAGR during 2010-14.
Figure 21: GG opex breakdown, 2013
Depreciation
4%
Office supplies,
repairs and
maintenance
15%
Others
16%
Transportation,
freight,
advertising
37%
Employee's
compensation
28%
IDEAS ENGINE
Figure 22: GG opex breakdown, 2014
Depreciation
6%
Office supplies,
repairs and
maintenance
13%
Others
16%
Figure 23: GG number of employees in

each quarter
Figure 24: GG operating profit vs

operating margin
2400
47000
20%
19%
2200
45000
18%
2000
43000
17%
16%
1800
15%
1600
41000
14%
13%
1400
39000
12%
1200
37000
11%
1000
10%
1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14
35000
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
Higher ad cost expected this year, but labour cost to

decline
Operating profit (Rp bn)
Operating margin (%)
Lower capex, free cash flow turns positive

Since 2012, GG has spent a significant amount on capex, totalling Rp14 tn. This includes
purchase of machineries for production and packaging, and for both replacement as well as for
expansion on the production of SKM. It is also building new warehouses and has resorted to
modernisation to create a better vertically integrated production facility. We view that the
massive capex cycle is completed, with its capex estimated to be at Rp3 tn this year, and Rp2
tn each in the next two years, which mostly is for capex maintenance. With the lower capex and
coupled with the operational improvement, GG's free cash flow is expected to turn positive this
year onwards. We continue to assume a 38% dividend payout ratio, which will provide a
dividend yield of around 2%.
For GG, debt is short term, mostly to finance its working capital, whereas a majority is to
purchase raw materials. We estimate debt to be at Rp17 tn this year, from Rp18 tn last year,
with the debt-to-equity still at a low 0.45x.
In all, we estimated GG's net profit to grow at a much higher rate at 17% CAGR over
2015E-17E, as compared to 7% CAGR during 2010-14. Its net margin is expected to be
8.6% this year, and recover to 9.4% in 2017E, from 7.8% in 2013.
Transportation,
freight,
advertising
28%
Employee's
compensation
37%
10
Figure 25: GG capex is lesser going
Figure 26: GG gross fixed asset
forward
6000
5429
40000
5625
35926
31926
28926
30000
4000
3000
2911
3000
in Rp bn
(in Rp bn)
33926
35000
5000
2000
2000
2000
20000
1646
15000
1183
1000
23301
25000
17872
13314
14960
10000
0
2010
2011
2012
2013
2014
5000
2015E 2016E 2017E
2010
2011
2012
2013
2014
2015E 2016E 2017E
Figure 27: GG net debt vs debt-to- equity
Figure 28: GG free cash flow to turn
positive this year onwards

20000
0.60
18000
16559
5000
17401
15432
16000
14385
0.50
11575
0.30
4000
2000
0.20
2011
2012
2013
2014
Net debt (Rp bn)
-4000
Debt-to-equity (x)
2010
10000
7398
7000
6423
6000
4014
4000
10%
-15%
2000
-20%
2013
Net profit (Rp bn)
2014
2014
2015E 2016E 2017E
11%
12%
11%
10%
9%
9%
9%
9%
8%
8%
-5%
-10%
2012
-3378
2013
15%
0%
4329
3000
2011
-3336
5%
5369
4894
4146
12%
25%
20%
8000
2012
Figure 30: GG net margin

30%
8798
2011
Figure 29: GG net profit vs YoY growth

9000
-2035
-3000
2015E 2016E 2017E
2010
1004
52
-2000
0.10
2010
1648
1000
-1000
1434
5000
(in Rp bn)
6879
5069
6000
2000
0.40
10000
8000
3599
3000
14000
12000
4199
4000
8%
8%
7%
2015E 2016E 2017E

YoY growth (%)
IDEAS ENGINE
6%
2010
2011
2012
2013
2014
2015E
2016E
2017E

11
Upgrade TP to Rp66,800
We have adjusted our estimates on GG on the back of higher margins that result from a better
product mix as well as its ability to increase prices, and as clove prices remain stable. The
company also has lower employee costs thanks to its product mix. At the same time, capex is
expected to decline as it completes its three-year expansion programme. Free cash flow is
turning positive starting this year, with an improving net margin.
Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which is
below -1 std dev. In our view this is not warranted given the company's improving performance.
We upgrade our rating to OUTPERFORM with a target price of Rp66,800 (up from Rp53,500),
implying a 20x 2015E P/E, which is equal to its average historical relative P/E of 20x. This
valuation is also similar to the weighted average of forward earnings of cigarette companies
globally, whose earnings are lower than GG's. GG's earnings are estimated to witness a 17%
CAGR over 2015E-17E. Compared with the other consumer companies in Indonesia, which on
average trade at about 30-35x forward earnings, we believe GG's valuation is warranted, given
that its revenue and costs are mostly IDR-based, and thus immune to the fluctuation in
exchange rates.
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
1.0
0.9
0.8
Apr-10
Apr-11
Rel PE
New
2015E
2016E
Change
YoY growth
2015E 2016E
2015E 2016E
Company
Ticker
2015E
2016E
Revenue
73,783
83,296
74,518
83,340
1.0%
0.1%
14.3% 11.8%
Gross profit
15,279
17,422
15,893
17,869
4.0%
2.6%
18.8% 12.4%
Operating profit
9,688
10,963
10,214
11,470
5.4%
4.6%
19.1% 12.3%
Net profit
6,026
6,947
6,423
7,398
6.6%
6.5%
19.6% 15.2%
Gross
20.7%
20.9%
21.3%
21.4%
Phillip Morris
PM
International
British American BATS.L
Tobacco
Japan Tobacco 2914.T
Operating
13.1%
13.2%
13.7%
13.8%
ITC.Ltd
8.2%
8.3%
8.6%
8.9%
Sales volume (bn sticks)
86
90
85
90
-0.4% -0.3%
6.0%
5.2%
SKM
78
82
77
81
-1.6% -1.6%
6.1%
5.2%
SKM FF
61
62
63
65
3.8%
3.1%
SKM LTLN
17
20
13
16
-19.9% -21.2%
11.1% 13.2%
ASP (Rp/stick)
842
905
856
910
1.6%
SKM
858
921
874
931
1.9%
SKT
681
734
689
718
Margin analysis:
3.4%
4.5%
Rtg Mkt cap

US$ mn
ITC.BO
Imperial Tobacco IMT.L
Key assumptions:
SKT
Apr-13
Apr-14
STDEV +1
Apr-15
STDEV -1
Figure 33: Global tobacco comparables valuations
Rpbn
Net
Apr-12
Avg Rel PE
Figure 31: Gudang Garamchange in earnings

Old
Figure 32: GG trades at below five-year historical relative P/E
Price
l.c
N 131,642
85
80
n.a. 104,596
3,765
n.a.
EPS growth
15E
19.1 20.2 19.1
16.4%
n.a. 18.0 16.7 0.5%
16E
EV/EBITDA ROE (%)

(x)
15E 16E 15E 16E
6.1%
14.4 12.8
26 28
7.7%
14.4 14.1
56 64
61,932
4,109
4,300
18.9 18.1 16.5 13.8% 10.2%
10.8 11.2
18 18
43,425
352
384
31.3 28.0 25.0 11.9% 11.3%
20.6 20.5
34 35
n.a.
46,471
3,258
n.a.
n.a. 16.4 15.6 -2.3%
5.1%
13.9 14.5 13.5 -3.8%
7.4%
12.0 12.2
033780.KS
11,620 91,600 88,000
Gudang Garam
GGRM.JK
7,795 52,200 66,800
20.0 15.6 13.6 19.6% 15.2%
Swedish Match
SWMA.ST
6,221
15.7 18.4 18.1 10.8%
1.5%
13.6 14.3 247 139
BAT Malaysia
BATO.KL
5,315
67
76
22.8 20.3 19.5
3.9%
14.7 15.2 149 144
n.a.
80
492
n.a.
270
4.9%
4.9%
0.5%
8.0%
6.3%
*Share price as of 20 April 2015
1.0%
7.4%
6.5%
Source: Credit Suisse estimates, IBES estimates
1.1% -2.1%
14.3%
4.3%
230
n.a.
5.3%
6.9 5.3 32.9% 31.0%
20.8 19.5 18.1 -1.5% 7.6%
9.5
35 33
KT&G Corp
Wismilak Inti
WIIM.JK
Makmur
Weighted average
18.7% 15.5%
Target Target P/E (x)

PE (x)
l.c
15E 15E 16E
9.1
13 13
9.9 11.1
17 17
n.a.
n.a.
19 19
14.0 13.6
39 39
IDEAS ENGINE
12
Figure 34: Indonesia consumer comparables valuations

Ticker
Company
Rtg
Mkt cap
Price
TP
Target PE(x)
US$ mn
l.c
l.c
15E
China
P/E (x)
15E
16E
EPS growth (%)
EV/EBITDA (x)
15E
15E
24.5
24.7
21.7
13.0%
16E
13.2%
ROE (%)
16E
15E
16E
13.3
12.0
22
23
1044.HK
Hengan International
15,325
97
88
23.8
26.2
22.9
16.0%
14.5%
15.4
13.7
23
24
3331.HK
Vinda International
2,007
16
15
21.7
22.9
19.6
14.6%
17.0%
14.0
12.4
12
13
0151.HK
Want Want China
14,279
21.2
21.0
19.1
10.0%
9.8%
13.7
12.7
30
30
0322.HK
Tingyi
12,293
17
29.6
27.2
23.7
12.7%
14.8%
10.0
9.0
14
15
24.4
35.7
33.3
13.7%
16.1%
23.9
22.9
68
23.8
19.9
23
24
17
Indonesia
KLBF.JK
Kalbe Farma
6,772
1,860
1,350
25.3
34.8
29.0
17.2%
20.1%
GGRM.JK
Gudang Garam
7,547
50,500
66,800
20.0
15.1
13.1
19.6%
15.2%
9.6
8.6
17
ICBP.JK
Indofood CBP
6,499
14,350
11,800
22.2
27.0
22.7
17.2%
24.2%
17.3
14.5
20
21
INDF.JK
Indofood Sukses
5,013
7,350
8,100
15.8
14.4
n.a.
15.5%
n.a.
5.1
n.a.
16
n.a.
UNVR.JK
Unilever Indonesia
22,594
38,125
21,500
28.2
50.0
44.3
9.4%
12.8%
34.8
31.1
123
120
39.5
40.7
33.7
10.9%
19.5%
30.3
25.3
56
58
India
COLG.BO
Colgate-Palmolive India
4,515
2,077
2,210
52.9
49.7
39.1
19.5%
27.1%
35.2
27.2
82
80
DABU.BO
Dabur India
7,668
273
255
41.2
44.1
35.8
18.0%
23.1%
36.1
29.8
33
34
EMAM.BO
Emami Ltd
3,779
1,041
1,110
51.8
48.6
37.2
20.8%
30.6%
41.3
31.6
41
42
GLSM.BO
GlaxoSmithkline
4,235
6,300
6,160
43.3
44.3
35.3
-11.3%
25.6%
43.0
33.1
28
29
GOCP.BO
Godrej Consumer
6,371
1,171
1,210
44.4
42.9
33.8
22.9%
27.1%
31.3
25.9
21
22
HLL.BO
Hindustan Unilever Ltd
32,388
937
955
51.8
50.8
40.7
3.2%
24.8%
38.3
31.0
103
108
ITC.BO
ITC Ltd
45,070
352
320
26.1
28.7
25.8
11.0%
11.3%
21.2
19.2
34
35
MRCO.BO
Marico Ltd
4,292
416
420
46.0
45.6
34.9
21.4%
30.7%
31.4
24.8
36
36
NEST.BO
Nestle India
10,767
6,986
6,100
41.1
47.1
40.1
19.0%
17.3%
28.2
24.8
56
64
28.3
26.7
23.9
11.1%
15.0%
10.8
11.0
43
45
9.2%
11.4%
11.1
10.6
640
665
Japan
2897.T
Nissin Foods Holdings
n.a.
5,285
5,690
n.a.
n.a.
29.8
26.8
2914.T
4452.T
Japan Tobacco
62,188
4,122
4,300
20.2
18.1
16.7
6.9%
16.0%
9.1
9.6
18
18
Kao
24,948
5,911
7,000
40.0
33.1
29.5
11.7%
14.7%
10.7
11.6
12
13
4911.T
Shiseido
7,554
2,249
1,690
37.4
49.0
42.1
-31.2%
18.3%
13.7
13.1
8113.T
Unicharm
15,521
3,068
3,000
37.3
38.6
34.3
48.0%
11.3%
16.2
14.8
11
11
23.0
23.2
20.1
22.4%
13.6%
13.6
12.3
18
17
033780.KS
KT&G Corp
11,660
91,600
88,000
13.9
14.5
13.5
-3.8%
7.4%
9.5
9.1
13
13
051900.KS
LG Household & Healthcare
12,945
894,000
900,000
31.3
31.1
26.1
45.9%
19.3%
17.3
15.2
22
21
22.8
20.4
19.6
5.3%
3.9%
14.8
14.5
149
144
22.8
20.4
19.6
5.3%
3.9%
14.8
14.5
149
144
22.3
34.3
29.3
13.9%
16.6%
22.2
19.3
20
22
Korea
Malaysia
BATO.KL
BAT Malaysia
5,370
68
76
Phillipines
URC.PS
Universal Robina Corp.
EMP.PS
Emperador Inc.
n.a.
10,609
215
n.a.
n.a.
36.8
30.8
17.6%
19.5%
23.1
19.6
22
24
4,098
11
22.3
27.8
25.5
4.2%
9.1%
19.9
18.4
16
16
18.2
19.4
17.2
27.7%
12.7%
8.5
7.7
15
16
18.2
19.4
17.2
27.7%
12.7%
8.5
7.7
15
16
30.2
31.8
27.6
12.2%
16.0%
19.5
17.4
46
48
Taiwan
1216.TW
Uni-President
8,908
Weighted average
50.50
47.40
*Share price as of 20 April 2015. Source: Credit Suisse estimates, IBES estimates
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Companies Mentioned (Price as of 22-Apr-2015)

BAT Malaysia (BATO.KL, RM65.5)
British American Tobacco (BATS.L, 3734.0p)
Colgate-Palmolive India (COLG.BO, Rs1957.95)
Dabur India (DABU.BO, Rs266.5)
Emami Ltd (EMAM.BO, Rs1003.65)
Emperador Inc. (EMP.PS, P11.38)
GlaxoSmithkline Consumer Healthcare (GLSM.BO, Rs6332.95)
Godrej Consumer Products Ltd (GOCP.BO, Rs1127.9)
Gudang Garam (GGRM.JK, Rp53,100, OUTPERFORM, TP Rp66,800)
Hengan International (1044.HK, HK$95.85)
Hindustan Unilever Ltd (HLL.BO, Rs905.1)
ITC Ltd (ITC.BO, Rs343.7)
Imperial Tobacco (IMT.L, 3293.0p)
Indofood CBP (ICBP.JK, Rp14,250)
Indofood Sukses Makmur (INDF.JK, Rp7,400)
Japan Tobacco (2914.T, 4,264)
KT&G Corp (033780.KS, W92,900)
Kalbe Farma (KLBF.JK, Rp1,900)
Kao (4452.T, 6,145)
LG Household & Healthcare (051900.KS, W894,000)
Marico Ltd (MRCO.BO, Rs396.45)
Nestle India (NEST.BO, Rs6847.85)
Nissin Foods Holdings (2897.T, 5,760)
Philip Morris International (PM.N, $83.69)
Shiseido (4911.T, 2,381)
Swedish Match (SWMA.ST, Skr270.2)
Tingyi (0322.HK, HK$16.74)
Uni-President Enterprises (1216.TW, NT$50.4)
Unicharm (8113.T, 3,142)
Unilever Indonesia (UNVR.JK, Rp40,350)
Universal Robina Corp. (URC.PS, P217.0)
Vinda International Holdings Ltd (3331.HK, HK$15.68)
Want Want China Holdings Ltd. (0151.HK, HK$8.48)
Wismilak Inti (WIIM.JK, Rp493)
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Disclosure Appendix
Important Global Disclosures
I, Ella Nusantoro, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this report.
3-Year Price and Rating History for Gudang Garam (GGRM.JK)
GGRM.JK
Date
31-Jul-12
31-Oct-12
26-Feb-13
15-Jul-13
17-Sep-13
06-Apr-14
07-Apr-14
31-Oct-14
Closing Price
(Rp)
56,350
49,150
49,450
45,600
43,000
48,900
50,200
57,750
Target Price
(Rp)
50,000
44,600
46,100
40,300
37,500
46,200
46,200
53,500
Rating
U
* Asterisk signifies initiation or assumption of coverage.

U N D ERPERFO RM
N EU T RA L
The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment
banking activities
As of December 10, 2012 Analysts stock rating are defined as follows:

Outperform (O) : The stocks total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stocks total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stocks total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stocks total return relative to the analyst's coverage universe which consists of all com panies covered by the analyst within the relevant sector, with
Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stocks total return
relative to the analyst's coverage universe which consists of all companies c overed by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attrac tive, and Underperforms the least attractive
investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; prior to 2n d October 2012 U.S. and Canadian
ratings were based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a stocks total return potential within an analysts coverage universe. For Australian and New Zealand stocks, 12-month
rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshol d replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1015% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japa nese ratings were based on a stocks total return relative to the average total return of the relevant country or regional be nchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's
engagement in an investment banking transaction and in certain other circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.
Analysts sector weightings are distinct from analysts stock ratings and are based on the analysts expectations for the fundamentals and/or valuation of the sector* relative to the groups historic fundamentals and/or
valuation:
Overweight : The analysts expectation for the sectors fundamentals and/or valuation is favorable over the next 12 months.
Market Weight : The analysts expectation for the sectors fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analysts expectation for the sectors fundamentals and/or valuation is cautious over the next 12 months.
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*An analysts coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple se ctors.
Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution
Rating
Versus universe (%)
Of which banking clients (%)
Outperform/Buy*
43%
(53% banking clients)
Neutral/Hold*
38%
Underperform/Sell*
16%
Restricted
3%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, resp ectively; however, the meanings are not the same,
as our stock ratings are determined on a relative basis. (Please refer to definit ions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
Credit Suisses policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions
stated herein.
Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connection
with Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html
Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Gudang Garam (GGRM.JK)

Method:
Our target price of Rp66,800/share for Gudang Garam implies a 20x P/E 2015E at the target price, with an estimated 17% estimated earnings growth over the next two years. We derive our target price
using discounted cash flow (DCF) method, where we are assuming 9.8% WACC on 5.2% terminal growth. Our weighted average cost of capital (WACC) assumes a 7.5% risk-free rate, 0.5 beta, 5% risk premium,
and a 28% corporate tax.
Risk:
The following risks could impede the achievement of our Rp66,800/share target price for Gudang Garam. (1) Change in government regulation: There is no specific timeline as to when the GoI (Government of
Indonesia) is going to revise excise tax regulations. In the past two years, the tax has been revised yearly, and was favourable to SKM (machine-made cigarettes) and tier 1 companies (large-size producers,
producing more than 2 bn sticks), narrowing the gap in tax to the SKT (hand rolled cigarettes) and mid and smaller size producers. (2) Strong demand for low tar, low nicotine: GG's brands in the low-tar, lownicotine category include the Nusantara series and Surya Slim series, and last year it launched Surya Slim Premium and Surya Pro Mild. However, its presence in this category is relatively small. Low-tar, lownicotine kretek cigarettes have been posting strong growth in the past decade, particularly for younger smokers in urban areas. (3) Consumers down-trading to less expensive cigarettes: If the GoI increases the
excise tax, cigarettes will become more expensive, encouraging consumers to downtrade to cheaper products. (4) Weak consumer purchasing power: Although the consumer confidence index, surveyed by Bank
Indonesia, showed that the confidence of Indonesian consumers is rising, concerns about the possibility of higher inflation (due to the recent increase in electricity tariffs) might disrupt consumer affordability. (5)
Rising interest rates: GG's debt is usually Rupiah-denominated and in the form of short-term loans. This is used for raw materials (clove) purchasing, where typically the harvest season peaks at the end of 4Q and
1Q (depending on the weather). A rise in interest rates would increase its interest expense, hence affecting its profitability.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (0322.HK, 051900.KS, 1044.HK, 1216.TW, 2914.T, 8113.T, BATO.KL, BATS.L, EMP.PS, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) currently is, or was
during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.
Credit Suisse provided investment banking services to the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months.
Credit Suisse has managed or co-managed a public offering of securities for the subject company (2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N) within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months
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Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T, 4911.T,
8113.T, BATO.KL, BATS.L, COLG.BO, EMAM.BO, EMP.PS, GLSM.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) within the next 3 months.
As of the date of this report, Credit Suisse makes a market in the following subject companies (PM.N).
Credit Suisse may have interest in (GGRM.JK, ICBP.JK, INDF.JK, KLBF.JK, UNVR.JK)
Credit Suisse may have interest in (BATO.KL)
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (033780.KS, IMT.L).
Credit Suisse has a material conflict of interest with the subject company (051900.KS) . Credit Suisse is acting as exclusive financial advisor to LG Household & Health Care Ltd. for the acquisition of Everlife Co., Ltd. from
CLSA Sunrise Capital, L.P.
Credit Suisse has a material conflict of interest with the subject company (BATS.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchase
agreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.
Credit Suisse has a material conflict of interest with the subject company (IMT.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchase
agreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.
For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GGRM.JK, 0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T,
4911.T, 8113.T, BATO.KL, BATS.L, COLG.BO, DABU.BO, EMAM.BO, EMP.PS, GLSM.BO, GOCP.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, ITC.BO, KLBF.JK, MRCO.BO, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS)
within the past 12 months
Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.
Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment
dealer would be required to make if this were its own report.
For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.
Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (IMT.L).
The following disclosed European company/ies have estimates that comply with IFRS: (BATS.L, IMT.L, SWMA.ST).
Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (1216.TW, 2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N, URC.PS) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.
To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research
analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD
Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.
PT Credit Suisse Securities Indonesia .............................................................................................................................................. Ella Nusantoro
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.
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Equity Research Asia Pacific / Indonesia

Gudang Garam (GGRM.JK)

The Ideas Engine

Looking through the smoke

Avg (2010-15): 1.25

Source: Company data, Bloomberg

CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS

2015E 2016E 2017E

CAGR 10-14: 10.2%

Figure 3: with margins by products seen improving

Figure 2: and it has pricing power

Figure 1: GG has the preferred mix of machine-made from

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Figure 4: Lower cost and opex resulting in operating

Figure 5: The capex ending

Figure 6: leading to positive FCF this year onwards

Operating profit (Rp bn)

Operating margin (%)

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

2015E 2016E 2017E

2015E 2016E 2017E

Source: Company data, Credit Suisse estimates

Looking through the smoke

We expect GG to continue to gain market share in machine-rolled cigarettes (SKM). We are

Worries discounted; offers a buying opportunity

Turning cash flow positive

Gudang Garam (GGRM.JK)

In the right spot

Sales vol (bn sticks)

YoY growth (%)

Source: Company data, Credit Suisse estimates

Figure 8: GG volume composition

Source: Company data, Credit Suisse estimates

Figure 9: Credit Suisse Indonesia Consumer Survey - cigarette consumption by cigarette

Pricing power is seen...

19.6% 375 415 10.7%

7.1% 285 305 7.0%

7.1%- 245 265 8.2%

Chg Old New

20.6% 380 425 11.8%

17.1% 245 270 10.2%

nicotine kretek cigarettes, and SKT is hand-rolled kretek cigarettes.

MRP (Minimum Retail Price)

345-444 425-520 17.1%- 195 220 12.8%

10.1% 275 290 5.5%

550-749 606-825 10.1%- 205 220 7.3%

349-379 385-417 10.0%- 120 125 4.2%

* Based on Ministry of Finance Decree No. 205/PMK.011/2014, effective on 1 Jan 15.

Figure 12: to keep up with the tax

CAGR 10-14: 10.2%

CAGR 10-14: 11.0%

2015E 2016E 2017E

2015E 2016E 2017E

Tax cost/stick (Rp)

YoY growth (%)

YoY growth (%)

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Figure 13: GG ASP comparables noodles

Figure 14: GG ASP comparables

Source: Gudang Garam, Indofood, CS estimates