Buy, 21% upside

2nd August 2024

Price Rp 675

Target price Rp 815

Investment Consideration

Volume decreased in 2Q2024

• HMSP record lower sales volume following  domestic market declines due to higher average selling prices in 2Q2024. The domestic market recorded slightly lower sales volume of 71.9 billion sticks in 2Q2024, while HMSP with higher price increases recorded a -5.7% YoY decline to 19.7 billion sticks, with lower market share of 27.3% compared to 29.1% in 2Q2023. For 1H2024, domestic sales volume increased +3.1% YoY to 145.8 billion sticks, while HMSP’s sales volume decreased by -2% to 39.9 billion sticks.
• The higher prices of cigarettes & lower volumes is in response to higher excise taxes, while consumers keep downgrading to lower-priced cigarettes, this has led to a surge in third-party manufacturing in Indonesia. Based on Phillip Morris International’s own research, Illicit cigarettes have increased almost 50% since 2020, and growth was 6.9% in 2023.
• Due to the impact of lower sales volume, HMSP’s sales decreased by -1.6% YoY or -1.4% QoQ to IDR 28.7 trillion.
• HMSP’s hand-rolled clove cigarettes (SKT) was the only segment which recorded positive-growth at +14.5% YoY to IDR 9.028 trillion. While hand-rolled white cigarettes (SPT) declined -9.7% YoY to IDR 212.5 billion.  Machine-made clove (SKM) sales also decreased by -9.4% QoQ to IDR  16.6 trillion, while Machine-Made White (SPM) cigarettes declined by -14.2% YoY to IDR 1.8 trillion.
• In terms of  heated tobacco products (HTU), HMSP sold 0.5 billion units in 1H2024 providing 1.25% of total sales volume, with market share up to 0.3%. For 2Q2024, HMSP sold 0.3 billion units which is growth of +89% YoY and market share reached 0.4% in the total market and 4.5% in Jakarta.

2Q2024 Results: negative YoY performance

• HMSP’s net profit decreased by -33% YoY or -52% QoQ to IDR 1.07 trillion, with a lower net profit margin (NPM) of 3.7% in 2Q2024, which is down from 7.7% in 1Q2024 due to price hikes in 2Q2024.
• Despite higher raw material costs in 2Q2024, the cost of sales slightly decreased by -0.1% YoY to IDR 24.7 trillion. Excise  tax costs also increased by +13% YoY. As a result, HMSP gross profit margin was lower at 13.7% in 2Q2024.
• We expect demand will improve along with margins in the 2H2024 as the market adjusts to the price hikes in 1H2024.

Valuation: Lower TP at 815, But still A BUY

• We are targeting HMSP to trade at a 11x 2025F PE within a year. The resulting target price is IDR 815. As this  represents 21% upside, we maintain our recommendation to BUY.