Workers at a factory of HM Sampoerna, the biggest cigarette maker in Indonesia. (Photo courtesy of HM Sampoerna)

Tax Hikes Weigh Down Stocks in Cigarette Companies


APRIL 19, 2017

Jakarta. Stocks of cigarette producers have been performing lower than the benchmark on the local bourse so far this year amid concern among investors about the impact of the government's tax policy on the sector.

Hanjaya Mandala Sampoerna, Gudang Garam and Wismilak Inti Makmur have gained 3.9 percent, 2.5 percent and 1.8 percent, respectively, since the beginning of the year, falling behind the 6.5 percent gain in the benchmark Jakarta Composite Index. Shares of Bentoel International Investama, controlled by British American Tobacco, are trading 2.2 percent lower compared to the start of the year.

Koneksi Kapital equity analyst Alfred Nainggolan said the industry is currently facing growth challenges due to a government regulation that seeks to increase excise tariffs and value-added tax on cigarettes.

"The cigarette industry in Indonesia is already mature and it is quite hard to expect these companies to grow more than they should," Alfred said.

An increase in excise and value-added tax (PPN) is the main factor hampering the cigarette industry.

"Consumers are still buying the products, but [the tax increase] is lowering demand, which affects cigarette production," Alfred said.

The government raised value-added tax by an average 9.1 percent, effective on Jan. 1 this year, following an 8.9 percent increase in 2016. The government also raised excise on cigarette products by an average 10.54 percent at the beginning of the year. However, this is less than last year's 11 percent hike.

An annual tax hike on cigarettes has been government strategy over the past decade to discourage use of the cancer-inducing product in Indonesia, where one in every three people is a smoker.

He said intensified anti-smoking campaigns also discourage people from buying cigarettes. In February, high school students at 30 schools in the greater Jakarta area, including Bekasi, Bogor and South Tangerang, held a rally to protest against tobacco advertisements near their schools.

Cigarette producers have resorted to raising prices to boost their revenues, passing the tax expense on to customers, Alfred said. The country's largest cigarette maker, HM Sampoerna, saw its net income rise 26 percent in 2016 from a year earlier, despite production falling by 3.9 percent to 105.5 billion cigarettes.

Despite the negative sentiment, Alfred said smokers are known as loyal customers. They stick with the same brand and smoke the same cigarette product for years, despite slight price increases.

"That is one of the factors that maintain these companies' business," Alfred said.