Buy, 24% upside

13th November 2024

Price Rp 680

Target price Rp 840

Investment Considerations

Declining volume trend continues

• HMSP reported lower sales volume, in line with the domestic market decline, driven by weak consumer purchasing power and higher average selling prices in 3Q2024.
• The domestic market recorded a slight decrease of 3.3% in sales volume, totaling 75.5 billion sticks in 3Q2024, while HMSP experienced a sharper decline of 9.2% YoY to 20.6 billion sticks, resulting in a lower market share of 27.9%, down from 29.0% in 3Q2023. For the first nine months of 2024, domestic sales volume increased by 0.86% YoY to 221.4 billion sticks, but HMSP’s volume fell by 5.4% to 60.1 billion sticks.
• The decrease in cigarette sales volume is attributed to rising cigarette prices and consumers shifting to lower-priced alternatives. This trend has also led to the growth of third-party manufacturing in Indonesia.
• Consequently, HMSP’s sales dropped by 1.6% YoY but rose by 6.8% QoQ to IDR 30.65 trillion.
• HMSP’s hand-rolled clove cigarettes (SKT) showed positive growth, up 7.8% YoY and 21.7% QoQ to IDR 11.07 trillion. Conversely, sales of hand-rolled white cigarettes (SPT) fell by 19.7% YoY to IDR 217.9 billion, and machine-made clove (SKM) sales declined by 7.9% QoQ to IDR 16.6 trillion. Machine-made white (SPM) cigarettes also saw a significant drop of 21.6% YoY to IDR 1.58 trillion.
• In the heated tobacco unit (HTU) segment, HMSP posted substantial growth, up 99.9% to 0.3 billion units in 3Q2024, and 100% YoY to 0.8 billion units for 9M2024.

3Q2024 Results: Improved quarterly Performance

• HMSP’s net profit fell by 22.3% YoY but increased by 78.3% QoQ to IDR 1.9 trillion, with an improved net profit margin of 6.2%, up from 3.7% in 2Q2024.
• Despite a 20% YoY increase in raw material costs, the cost of sales decreased slightly by 1.4% YoY to IDR 25.58 trillion, and excise tax costs dropped by 2.9% YoY. Consequently, HMSP’s gross profit margin improved to 16.5% in 3Q2024 from 13.7% in 2Q2024.
• Advertising and promotion expenses increased by 20.7% in 3Q2024 to IDR 671 billion. Operating expenses rose by 27% YoY but decreased by 6% QoQ, leading to a 20% YoY drop in operating income to IDR 2.59 trillion, with an operating profit margin of 8.5%.
• With a new government administration, the latest tobacco excise regulation has yet to be officially decided. Speculation about tobacco excise tax remaining unchanged or not increasing in 2024 presents a positive outlook for the cigarette sector.

Valuation: Maintain BUY TP 840

• We are targeting HMSP to trade at 11x 2025F PE within a year, with a target price of IDR 840, representing a 24% upside. We maintain our recommendation to BUY.