Buy, 37% upside

4th April 2024

Price Rp 840

Target price Rp 1150

Investment Consideration

Maintaining a stable market share

• Due to an increase in third-party manufacturing in Indonesia, HMSP witnessed a -4.2% year-on-year (YoY) decline in sales volume to 20.3 billion sticks in Q4 2023, mirroring a decrease in the domestic cigarette sales volume, which fell by -1.2% to 72.5 billion sticks. Throughout 2023, HMSP’s sales volume experienced a -3.9% YoY decline to 83.4 billion sticks, while the domestic sales volume also saw a reduction of -4.1%. Despite these decreases, the market share remained stable at 28.6% in 2023.
• The decline in cigarette sales volume can be attributed to higher cigarette prices in response to increased excise taxes. Concurrently, consumers shifted towards lower-priced cigarettes, significantly impacting the growth and expansion of third-party manufacturing in Indonesia.
• Following a price increase at the beginning of the year, HMSP’s sales rose by 5.5% YoY but saw a -10.7% quarter-on-quarter (QoQ) decline to IDR 27.8 trillion.
• HMSP’s hand-rolled clove cigarettes (SKT) recorded the fastest growth at 17.7% YoY to IDR 7.5 trillion, followed by hand-rolled white cigarettes (SPT) with a 13% YoY increase to IDR 248 billion. Sales of machine-made clove cigarettes (SKM) remained stable YoY but rose by 2.4% QoQ to IDR 17.5 trillion, whereas Machine-Made White (SPM) cigarettes declined by -6.3% YoY to IDR 2.25 trillion.
• Amid a global decline in cigarette volumes, HMSP’s IQOS club member program, which markets the IQOS brand of heated tobacco, targets the high-consumption Indonesian market. With annual cigarette consumption in Indonesia reaching 300 billion sticks, this presents a significant market opportunity for IQOS. PMI has set a target for HMSP to sell 30 billion sticks by 2030.

4Q2023 Results: Improved YoY performance

• HMSP’s net profit rose by 33% YoY but fell by -23% QoQ to IDR 1.89 trillion, resulting in a net profit margin (NPM) of 6.6% in Q4 2023. This NPM contracted from 7.9% in Q3 2023 but improved from 5.1% in Q4 2022, buoyed by early-year price increases.
• Alongside higher sales, the cost of sales increased marginally by 2.7% YoY to IDR 23.7 trillion in Q4 2023, driven by a 26.9% YoY rise in raw material costs, while excise tax costs decreased by -7.8% YoY. Consequently, HMSP’s gross profit margin reached 17% in Q4 2023, showing an improvement both YoY and QoQ.
• Anticipating enhanced demand in the first half of 2024, particularly due to the election period potentially boosting consumption, we forecast HMSP’s sales to grow by 7% YoY, reaching IDR 124 trillion in 2024F, with a bottom-line profit of IDR 8.83 trillion.

Valuation: TP 1,150 BUY

• We project HMSP to trade at a 14x forward P/E ratio within a year. Our target price is IDR 1,150, indicating 37% upside potential. We reaffirm our BUY recommendation.