CLSA GGRM, warung survey

We surveyed 50 mom and pop stores (warungs) in Jakarta and Bandung. As pointed out by analyst Swati in her 2009 warung report, “Protective Net – micro retailers cushion the economy”, warung is an important part of Indonesian life. A large number of cigarettes sold in Indonesia are on a per stick basis. Warungs that we visited sell at least 30% cigarettes on per stick basis. Obviously, one can’t go to a hypermart and buy just one stick of cigarette.

That’s why we surveyed 50 warungs to have a better understanding of how Gudang Garam (GGRM IJ) is doing.

Key findings from our survey:
· The feedback on GGRM is encouraging as 59% said that there has been improvement in GGRM products in last few months
· All warungs sell at least 30% cigarettes on per stick basis while 50% said that they sell more than 50% of cigarettes on per stick basis.
· 100% said that taste is the most important factor in selection of cigarette. This explains why it is hard to challenge the top brands.
· Most of the smokers are willing to try out new cigarettes and 100% said that advertising and packaging play an important role
· Nearly 54% said that Surya slims (GGRM mild cigarette) is “ok to good” while 84% rate Surya premium “ok to good”
· Maintain BUY on GGRM.

Despite the stellar stock price performance recently, GGRM valuation is still very reasonable at 13.4x 10CL P/E and 11.4x 2011CL P/E, compared to 20.8x 10 P/E and 19.9x 11 P/E for the regional cigarette peer average. GGRM is also the cheapest consumer stock in our Indonesian consumer coverage.

The number of cigarettes consumed in Indonesia increased by 70% over 1992-2008 from 153bn in 1992 to 260bn cigarettes in 2008. This translates into an industry growth of 3.4% per annum, clearly far better than the growth in a more developed market. Cigarette is not (yet) a sun set industry on this part of the world.