CLSA GGRM upgrade, conviction BUY, TP Rp40,000

Swati raised her TP for Gudang Garam (GGRM IJ) from Rp31,300 to Rp40,000 and reiterates conviction BUY.

Swati met an industry contact and learned that Gudang Garam Surya (regular) which makes up 50% of its sales is doing very well. The other product GGRM International (30% of sales) have seen volumes stabilizing. Mild is picking up gradually.

Swati also highlights that there is significant difference in pricing to the retailers between GGRM and competitor products which are sold at similar pricing to the end customer. Correcting this difference could translate into additional Rp1.25tn of profit or 31% of our 2010 forecasts. In fact GGRM is already increasing prices in steps. They seem to have realized that lower price strategy simply failed as innovativeness, taste, and branding proved to be more important than price.

But the bigger story yet to be played out is industry consolidation. Top five cigarette makers control 77% of the market. We think the government will gradually phase out the middle layers by creating more equal playing field via excise tax mechanism. This will benefit the big players such as GGRM.