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Old Habit Dies Hard

In Indonesia, smoking isn't merely a habit; it's a cultural legacy that has been passed down through generations, intricately woven into the very fabric of the nation's identity for centuries.

The distinctive aroma of hand-rolled cigarettes, known as kretek, doesn't just linger in the air during casual moments—it becomes a companion in business decisions, in the midst of heated negotiation, the ritual of offering to light a cigarette may serve as a cultural bridge, evoking a sense of tradition and camaraderie.

With a smoking prevalence of 28.28% in 2022, Indonesia expects this figure to climb over the years. This expectation is unsurprising given that Indonesia ranks among the leading tobacco producers globally, generating 225.7k mt in 2022.

Source: Statista

Furthermore, the tobacco industry serves as a vital economic force, making substantial contributions to national revenue through taxes (amounting to IDR198 tn last year). Additionally, it plays a pivotal role in job creation, the backbone of livelihoods of numerous families.

Source: Goodstats

In recent years, we've witnessed changes in tobacco trends, driven by reduced purchasing power, particularly in the middle to lower class, and a substantial increase in cigarette prices due to a double-digit excise tax hike—well beyond the already elevated inflation rate.

Therefore, there has been a shift towards downtrading to cheaper cigarettes type such as SKT, SKM 2nd tier as well as an increase in the consumption of illegal cigarettes. Meanwhile, those with greater purchasing power and a heightened focus on health are transitioning their consumption to electronic cigarettes.

As one of the largest cigarette producers, HMSP is prepared to welcome this shift. The SKT segment witnessed a resurgence and experienced a sales ascent to ~30% yoy in 9M23

HMSP's sales revenue from SKT in the 9M23 has already exceeded the total SKT revenue for the entire year of 2022, rising from IDR 22.4 tn to IDR 25.7 tn. This growth in the SKT segment effectively offsets the decline in SKM.

Source Sucor Sekuritas, Company

In response to the positive trajectory, HMSP is set to unveil two new SKT production facilities, situated in Blitar City, East Java, and Tegal Regency, Central Java. These facilities are scheduled to kick off operations in the 1Q24, marking a strategic move to capitalize on the segment's recovery.

With these new facilities will come tens of thousands of additional jobs. HMSP's current workforce exceeds 76,000 individuals, both directly and indirectly, with ~90% working in SKT production facilities. Notably, the majority of SKT employees are women, many of whom play a dual role as the backbone of their families.

Simultaneously, to meet the rising demand for electronic cigarettes, through its IQOS ILUMA product. Theirs new production facility in Karawang started operation earlier this year, focusing on exports to the Asia Pacific and domestic markets.

Source: Sucor Sekuritas

While IQOS revenue is still relatively small to HMSP’s total revenue, Philip Morris International reports a substantial shift, with at least 17.8 mn smokers switching from traditional cigarettes. In 2022, smoke-free tobacco products contributed around 32% to the company's total  revenue, reaching an impressive USD31.76 bn globally.

These milestones signify significant strides in providing scientifically supported, smoke-free products that, while not risk-free, offer improved alternatives for adult smokers. Additionally, they contribute to increased exports of finished products with high added value, improving the downstreaming of the industry.

Source: Sucor Sekuritas

What we want to highlight is that, in comparison to HMSP's close competitor GGRM, HMSP displays greater agility and adaptability in response to the evolving tobacco industry landscape. We can see this through the revenue breakdown, with HMSP's SKT revenue reaching IDR 25.6 tn in 9M23, while GGRM's stands at IDR 6.9 tn. It is evident that HMSP is reaping the benefits of an increased market share in the SKT segment.

In conclusion, diversification emerges as a crucial success factor for HMSP in navigating reduced purchasing power. Overcoming the challenge of expensive cigarettes, the solution involves providing more affordable alternatives.

It seems for Indonesians, finding new flavors is a more achievable mission than giving up smoking altogether!

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