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CREDIT SUISSE SECURITIES RESEARCH & ANALYTICS BEYOND INFORMATION®

Client-Driven Solutions, Insights, and Access

Equity Research Asia Pacific / Indonesia

Tobacco 23 April 2015

Gudang Garam (GGRM.JK)UPGRADE RATING

The Ideas Engineseries showcasesCredit Suisse’s uniqueinsights and investmentideas.

Looking through the smoke

In the right spot. A mix of strong brand name, pricing power, product mix, andvolume growth in a tough environment makes GG a strong contender in theIndonesian consumer space, while its costs and revenues are almost entirelyrupiah based, making it immune to the currency volatility. The fact that the stockhas fallen 13% YTD and underperformed the market by 17% makes it anattractive investment opportunity. Upgrade to OUTPERFORM (from Neutral).

Worries discounted; offers a buying opportunity. The market hasoverreacted to the potential excise tax hike and higher VAT. If this happens,we believe that GG has the ability to pass these through, as it hasconsistently done in the past.

Turning cash flow positive. The favourable product mix in favour ofmachine-made cigarettes should boost margins. Further, lower raw materialcosts, and lower employee costs should provide a fillip to GG's profitability.This improved profitability coupled with completed expansions resulting inlower capex is turning GG free cash flow positive starting this year.

Upgrade TP to Rp66,800. Our valuation puts GG firmly below its peersglobally and within Indonesia's consumer space, with higher growth rate(17% CAGR over 2015E-17E). GG has traded at a relative P/E of 1.25xover the past five years which gives us a target P/E of 20x, similar to theweighted average valuation of global peers. Currently it is trading 1 std. dev.below this five-year average. Our new TP of Rp 66,800 implies a 26%upside from current levels.

GG has an undemanding valuation, and it is trading at a discount to its five-year historical average relative P/E…

Source: Company data, Bloomberg

RESEARCH ANALYSTS

Ella Nusantoro 62 21 255 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure:Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity ofthis report. Investors should consider this report as only a single factor in making their investment decision.

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Rel PE Avg Rel PE STDEV +1 STDEV -1

Avg (2010-15): 1.25

Bbg/RIC GGRM IJ / GGRM.JKRating (prev. rating) O (N)Shares outstanding (mn) 1,924.09Daily trad vol - 6m avg (mn) 0.9Daily trad val - 6m avg (US$ mn) 3.7Free float (%) 23.6Major shareholders Suryaduta Investama

(69.29%)

Price (22 Apr 15 , Rp) 53,100TP (prev. TP Rp) 66,800 (53,500)Est. pot. % chg. to TP 2652-wk range (Rp) 63700.0 - 48100.0Mkt cap (Rp/US$ bn) 102,169.1/ 7.9Performance 1M 3M 12M

Absolute (%) 4.8 (9.2) 1.1Relative (%) 4.9 (11.4) (10.2)

Year 12/13A 12/14A 12/15E 12/16E 12/17E

Revenue (Rp bn) 55,437 65,186 74,518 83,340 93,440EBITDA (Rp bn) 7,721 10,018 11,854 13,243 15,117Net profit (Rp bn) 4,329 5,369 6,423 7,398 8,798EPS (Rp) 2,250 2,790 3,338 3,845 4,573- Change from prev. EPS (%) n.a. n.a. 7 6 12- Consensus EPS (Rp) n.a. n.a. 3,086 3,542 3,915EPS growth (%) 7.8 24.0 19.6 15.2 18.9P/E (x) 23.6 19.0 15.9 13.8 11.6Dividend yield (%) 1.5 1.5 2.0 2.4 2.8EV/EBITDA (x) 14.7 11.9 10.1 8.9 7.7P/B (x) 3.5 3.1 2.7 2.4 2.1ROE (%) 15.5 17.2 18.2 18.5 19.4Net debt(cash)/equity (%) 39.3 49.8 46.3 36.3 29.6Note 1: Gudang Garam is Indonesia's leading tobacco company. It produces the full range of kretekcigarettes including hand-made (SKT) and machine-made (SKM) cigarettes, both in full flavouredand low-tar, low-nicotine, under brands such as GG Merah, GG Surya and GG FI.

IDEAS ENGINE SERIES



IDEAS ENGINE 2

Gudang Garam (GGRM.JK)

Focus chartsFigure 1: GG has the preferred mix of machine-made from

hand-rolled…

Figure 2: …and it has pricing power Figure 3: …with margins by products seen improving

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 4: Lower cost and opex resulting in operating

margins improving

Figure 5: The capex ending Figure 6: …leading to positive FCF this year onwards

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

83% 84% 84% 88% 90% 90% 90% 90%

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ASP (Rp/stick) YoY growth (%)

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FIM 12 Surya 16 Merah 12

Pro Mild 16 GG Mild 16

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( i n R p b n )



IDEAS ENGINE 3


Looking through the smoke

In the right spot

Consumers are switching to machine-made kretek cigarettes (SKM) from hand-rolled cigarettes(SKT) due to their aging profile and higher clove prices (impacting SKT more than SKM). Thisbenefits Gudang Garam (GG), as 90% of its products are SKM-based. The shift to SKM,particularly SKM FF (fully flavoured) is in line with the results of Credit Suisse's IndonesiaConsumer Survey 2015, where smokers said they continued to prefer SKM to SKT.

We expect GG to continue to gain market share in machine-rolled cigarettes (SKM). We arelooking at GG to have a 5% volume growth on 7% higher ASP over the next two years, with themarket share in 2014 estimated to have been at about 23%. We believe that these assumptionsare higher than what the consensus is building into the valuations. GG has demonstrated itsability to pass on prices, with its ASP witnessing a 10% CAGR in the last four years, and despitethe tough environment, its volume still witnessed a 4% CAGR during the period.

Worries discounted; offers a buying opportunity

The market has overreacted, in our view, on the potential excise tax hike and higher VAT, as

the parliament approved the 2015 Government of Indonesia (GoI) budget revisions in February.The GoI is seeking a 24% YoY growth in excise tax revenue, or about 10% of the totaltargeted tax revenue of Rp1,489.3 tn. Even though there is no clarity thus far on how the newtarget will be achieved, the GoI stated that the increase will come from: (1) clamping down onillegal cigarettes, and (2) a better tax collection mechanism.

If the increase happens, we believe that GG has the ability to pass these through, as it hasconsistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to10% (from the current 8.4%) and an excise duty hike to 5% will require price increases of 5%and 8%, respectively, to maintain profitability, assuming other things remain similar.

Turning cash flow positive

We have adjusted our estimates on GG by about 7% for this year and next, on the back ofhigher margins that result from a better product mix as well as its ability to increase prices, andas clove prices remain stable. GG also has lower employee costs thanks to its product mix. Atthe same time, capex is expected to decline as it completes its three-year expansionprogramme. Free cash flow is turning positive starting this year, with an improving net margin.

Upgrade TP to Rp66,800

Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which isbelow -1 std dev. In our view this is not warranted given the company's improving performance.We upgrade our rating to OUTPERFORM with a target price of Rp66,800/share (up fromRp53,500/share), implying a 20x 2015E P/E, which is equal to its average historical relativeP/E of 20x. This valuation is also similar to the weighted average of forward earnings ofcigarette companies globally, whose earnings are lower than GG's. GG's earnings areestimated to witness a 17% CAGR over 2015E-17E. Compared with the other consumercompanies in Indonesia, which on average trade at about 30-35x forward earnings, we believeGG's valuation is warranted, given that its revenue and costs are mostly IDR-based, and thusimmune to the fluctuation in exchange rates.



IDEAS ENGINE 4


Gudang Garam (GGRM.JK)Price (22-Apr-15,Rp) 53100.0Market Cap (Rpmn) 102169072.8

Previous Value Current ValueRating NEUTRAL OUTPERFORMTarget Price (Rp) 53500.00 66800.00EPS FY1E (Rp) 3131.88 3338.06EPS FY2E (Rp) 3610.66 3845.00EPS FY3E (Rp) 4073.42 4572.56

Source: Credit Suisse Estimates, IBES

Income Statement 2014FYA 2015FYE 2016FYE 2017FYESales revenue 65,186 74,518 83,340 93,440Cost of goods sold 51,806 58,625 65,472 72,992SG & A 4,855 5,679 6,399 7,238Other operating exp./(inc.) -1,493 -1,640 -1,774 -1,907EBITDA 10,018 11,854 13,243 15,117Depreciation & amortisation 1,440 1,640 1,774 1,907EBIT 8,578 10,214 11,470 13,210Net interest expense/(inc.) 1,372 1,608 1,557 1,421Recurring PBT 7,206 8,606 9,913 11,789Taxes 1,811 2,151 2,478 2,947Profit after tax 5,395 6,454 7,435 8,842Minority interests 27 32 37 44Reported net profit 5,369 6,423 7,398 8,798

Net profit (Credit Suisse) 5,369 6,423 7,398 8,798Cash Flow 2014FYA 2015FYE 2016FYE 2017FYEEBIT 8,578 10,214 11,470 13,210Net interest -1,372 -1,608 -1,557 -1,421Tax paid -1,811 -2,151 -2,478 -2,947Working capital -5,224 -4,696 -2,961 -5,090Other cash & non-cash items 42 1 181 442Operating cash flow 213 1,760 4,655 4,194Capex -5,625 -3,000 -2,000 -2,000Free cash flow to the firm -5,412 -1,240 2,655 2,194Other investment/(outflows) 662 637 -12 -17Investing cash flow -4,963 -2,363 -2,012 -2,017Dividends paid -1,539 -2,040 -2,441 -2,811Net borrowings 5,101 1,046 -1,789 -741Financing cash flow 3,562 -994 -4,230 -3,552Total cash flow -1,188 -1,597 -1,587 -1,375Net change in cash -1,188 -1,597 -1,587 -1,375Balance Sheet 2014FYA 2015FYE 2016FYE 2017FYECash & cash equivalents 1,588 1,599 1,568 1,615Current receivables 1,532 1,943 2,275 2,652Inventories 34,739 39,783 42,913 48,179Other current assets 673 663 742 832Current assets 38,533 43,988 47,498 53,278Property, plant & equip. 18,973 20,333 20,559 20,652Other non-current assets 715 78 90 107Total assets 58,221 64,399 68,147 74,037

Accounts payable 989 1,168 1,214 1,273Short-term debt 18,147 19,000 17,000 16,000Current provisions 166 198 228 271Other current liabilities 4,480 5,019 5,523 6,065Current liabilities 23,783 25,385 23,964 23,609

Non-current provisions 1,209 1,402 1,613 1,873Total liabilities 24,992 26,787 25,578 25,481Shareholders' equity 33,093 37,476 42,433 48,420Minority interests 135 135 135 135Total liabilities & equity 58,221 64,399 68,147 74,037Per Share 2014FYA 2015FYE 2016FYE 2017FYEShares (wtd avg.) (mn) 1,924 1,924 1,924 1,924EPS (Credit Suisse) (Rp) 2,790 3,338 3,845 4,573DPS (Rp) 800.00 1,060 1,268 1,461BVPS (Rp) 17,199 19,477 22,054 25,165Operating CFPS (Rp) 110.75 914.58 2,419 2,180Earnings 2014FYA 2015FYE 2016FYE 2017FYESales revenue 17.6 14.3 11.8 12.1EBIT 28.2 19.1 12.3 15.2

Net profit 24.0 19.6 15.2 18.9EPS 24.0 19.6 15.2 18.9EBITDA 15.4 15.9 15.9 16.2EBIT 13.2 13.7 13.8 14.1Pre-tax profit 11.1 11.5 11.9 12.6Net profit 8.2 8.6 8.9 9.4Valuation 2014FYA 2015FYE 2016FYE 2017FYEP/E 19.0 15.9 13.8 11.6P/B 3.1 2.7 2.4 2.1Dividend yield (%) 1.5 2.0 2.4 2.8P/CF 479.4 58.1 22.0 24.4EV/sales 1.8 1.6 1.4 1.2EV/EBITDA 11.9 10.1 8.9 7.7EV/EBIT 13.8 11.7 10.3 8.8Returns 2014FYA 2015FYE 2016FYE 2017FYEROE 17.2 18.2 18.5 19.4ROIC 14.1 14.6 15.2 16.4

Asset turnover (x) 1.1 1.2 1.2 1.3Interest burden (x) 0.8 0.8 0.9 0.9Tax burden (x) 0.7 0.8 0.7 0.8Financial leverage (x) 1.8 1.7 1.6 1.5Gearing 2014FYA 2015FYE 2016FYE 2017FYENet debt/equity (%) 49.8 46.3 36.3 29.6Net debt/EBITDA (x) 1.65 1.47 1.17 0.95Interest cover (x) 6.25 6.35 7.37 9.29

Source: Company data, Credit Suisse Estimates



IDEAS ENGINE 5


In the right spot

Consumers favouring SKM fully flavoured

Last year, GG saw its volume increase 5% YoY to 80bn sticks, whilst the industry, as reportedby Nielsen, saw volume decline 0.8% YoY to 349bn sticks. Thus, GG is estimated to have hada market share of 23% in 2014, up from 21% in the previous year. The decline in the industryvolume has mostly been due to SKT (hand-rolled kretek cigarettes) products, comprising only10% of GG's total volume, and down 14% YoY.

On the other hand, the industry volume for SKM FF (machine made fully flavoured kretekcigarettes) was up 6% YoY and SKM low-tar, low-nicotine (LTLN) was up 3% YoY. GG is onthe right spot, with a majority (90% of total volume) of its products being SKM-based. Its SKMFF (accounts for 76% of total volume) saw a 6% YoY volume growth last year, and SKM LTLNgrew 14% YoY (accounting for 14% of total), despite its SKT products declining 12% YoY.We estimate a 5% volume growth over the next two years.

In 1Q15, Philip Morris International's (PM.N, US$84.98, NEUTRAL, TP US$80) 1Q15earnings release stated that the volume for Indonesia's cigarette industry grew 5.9% YoY to78bn, even though PMI views that the quarterly figures are volatile, thus only expecting a 2%

increase YoY this year. Volume for SKT still declined 1.7% YoY (accounting for 19% of totalvolume), while volume for SKM grew 2% YoY (accounting for 75% of total volume). GG hasyet to release its 1Q15 earnings, which is expected by the end of the month.

Figure 7: GG – volume vs volume growthYoY

Figure 8: GG – volume composition

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

The shift to SKM FF is in line with the results of Credit Suisse's Indonesia Consumer Survey2015. The smokers continue to prefer SKM to SKT, and SKM FF is the leading choicecompared with SKM LTLN. (Please refer to our report "Indonesia Consumer Survey 2015:Welcome to the fast lane..." published 9 February 2015)

In our survey, of the total, 33% of smokers preferred SKM FF (32% in last year's survey).Those that favoured SKM LTLN were down to 28%, from 30%, and SKT smokers are now at22% (versus 24% in the 2013 survey)—the lowest in the five years we have done the survey.This was underpinned by higher clove prices, which led to higher price increases in SKT. Wealso think that the aging profile that SKT has, might have resulted in a shift towards theyounger profile that preferred SKM. White cigarettes (SPM) continue to be the least populartype, only favoured by 6% of respondents—relatively stable from our previous survey.Interestingly, higher and lower income earners prefer SKM FF more compared to other types,while middle income earners prefer SKM LTLN and SKT.

By age group, the younger generations preferred SKM LTLN or white cigarettes, while theolder generations preferred SKT, and SKM FF is favoured by all age groups. Of ourrespondents in the age group below 30, 36% are fans of SKM LTLN, as compared to 32%

preferring SKM FF and 14% liking SKT products.

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https://doc.research-and-analytics.csfb.com/docView?language=ENG&format=PDF&document_id=806550770&source_id=csplusresearch&serialid=QW7arlhYba1CNQGGoiqAg99PLxyoqJGUhTfFVsnoKdc%3D








IDEAS ENGINE 6


Figure 9: Credit Suisse Indonesia Consumer Survey - cigarette consumption by cigarette

types Age Monthly income

% of

respondents

Total Urban Rural Java Non

Java

18-29 30-45 46-55 56-65 <Rp1.5mn Rp1.5-

7.5mn

>Rp7.5mn

2014

SKM FF 33 34 32 36 27 32 36 32 29 37 12 72

SKM LTLN 28 31 22 24 38 36 25 15 17 18 30 5

SKT 22 20 24 25 8 14 21 33 33 27 35 13White 6 7 5 7 7 9 4 5 4 10 8 3

Others 12 8 17 7 20 9 13 15 17 8 15 7

2013

SKM FF 32 31 36 34 28 35 28 33 43 35 21 87

SKM LTLN 30 28 30 29 7 37 25 13 13 28 26 4

SKT 24 23 24 24 40 11 28 41 33 23 34 6

White 6 8 2 7 5 9 6 4 0 2 9 1

Others 7 9 7 6 19 9 13 9 11 12 9 3

2012

SKM FF 31 28 34 34 28 30 32 34 25 33 18 85

SKM LTLN 23 28 17 30 16 32 24 8 3 29 31 4

SKT 26 26 25 22 27 17 29 36 51 19 28 6

White 7 9 6 10 7 13 8 3 3 3 11 3Others 14 8 18 5 22 8 7 18 19 16 11 2

2011

SKM FF 31 32 30 34 27 27 33 35 38 31 25 92

SKM LTLN 25 27 19 36 12 35 22 7 8 33 32 3

SKT 30 24 36 19 35 22 31 41 30 17 29 2

White 5 7 1 4 7 6 6 3 4 3 6 1

Others 10 10 13 6 19 10 9 14 20 15 8 2

2010

SKM FF 39 38 41 41 34 37 40 41 29 42 27 96

SKM LTLN 23 26 13 33 14 33 18 6 10 29 34 1

SKT 27 28 30 17 37 20 32 33 45 17 29 2

White 4 5 2 4 3 4 5 6 0 3 6 1

Others 7 4 14 5 11 6 5 14 15 9 4 1

* Note: SKM FF is machine-made full-flavored kretek cigarettes, SKM LTLN is machine-made low-tar, low-

nicotine kretek cigarettes, and SKT is hand-rolled kretek cigarettes.

Source: Credit Suisse Indonesia Consumer Survey 2015

Pricing power is seen...

GG has increased its ex-factory prices thrice this year, with the last increase being on 13 April.The increase has been due to the excise tax hike, which became effective 1 Jan 2015. Unlikein other countries, cigarette producers in Indonesia have been unable to pass through theincrease in excise tax immediately, instead choosing to implement it gradually. This is becausecigarette in Indonesia, at the street level, is still mostly sold by sticks instead of by packs, whichwe view is due to consumers' weak buying power.

Excise cost and VAT accounted for 68% of GG's total cost last year. The new excise taxincrease is 5.5% for SKT (hand-rolled cigarettes) and 10.7% for SKM (machine-madecigarettes) for Tier 1 producers (those that produce more than 2bn sticks a year). Excise costfor SKT is now at Rp319/stick and Rp457/stick for SKT, inclusive of the 10% regional tax. Inaddition to that, the GoI also charges an 8.4% on VAT costs on the banderole prices.

Figure 10: Indonesia's latest excise tax scheme, effective on 1 January 2015* Type Tier Annual

output

MRP (Minimum Retail Price) Tax/stick (Rp)

(sticks) (Rp/stick) Old New Chg Old New Chg

SKM I > 2 bn Above Rp800 669 800 19.6% 375 415 10.7%

(Machine-made,

kretek cig)

II < 2 bn Above Rp588 549 588 7.1% 285 305 7.0%

Below Rp588,min at Rp511

440-549 511-588 7.1%-16.1%

245 265 8.2%

SPM I > 2 bn Below at Rp820 680 820 20.6% 380 425 11.8%

(Machine-made,

white cig)

II < 2 bn Above Rp520 444 520 17.1% 245 270 10.2%


345-444 425-520 17.1%-23.2%

195 220 12.8%

SKT I > 2 bn Above Rp825 749 825 10.1% 275 290 5.5%

(Hand-rolled,

kretek cig)


550-749 606-825 10.1%-10.2%

205 220 7.3%

II 350 mn - 2bn

Above Rp379 379 417 10.0% 130 140 7.7%

Rp385-Rp417 349-379 385-417 10.0%-10.3%

120 125 4.2%

IIIA 50 mn - 350mn

Min price at Rp286 250 286 14.4% 80 85 6.3%

IIIB < 50 mn Min price at Rp286 286 n/a 80 n/a

* Based on Ministry of Finance Decree No. 205/PMK.011/2014, effective on 1 Jan 15.

Source: Ministry of Finance.



IDEAS ENGINE 7


Overall, GG has increased its average price by about 3-6% YTD, depending on the product. Bycomparison, last year, GG increased its prices an average 10-16%, depending on the product.Thus its blended ASP last year increased 12% YoY to Rp793/stick, of which there was a 12%increase in SKM products (Rp813/stick) and a 9% increase in SKT products (Rp602/stick).We estimate a blended ASP increase of 8% this year, on 6% higher volume growth YoY.Interestingly, not many know that, since 2008 GG's cigarette prices have been rising higherthan that of Indofood's noodle prices (post the end of price war). GG's blended ASP increasedat a 10% CAGR over 2008-14, with SKM increasing 10% and SKT 9%, while Indofood's

noodle prices increased 8% during this period.Figure 11: Prices have been rising… Figure 12: …to keep up with the tax

increase


Figure 13: GG – ASP comparables – noodlesvs cigarettes (in value)

Figure 14: GG – ASP comparables –

noodles vs cigarettes (YoY growth)

Source: Gudang Garam, Indofood, CS estimates Source: Gudang Garam, Indofood, CS estimates

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Noodles (Rp/pack) GG - SKM (Rp/stick) GG - SKT (Rp/stick)



IDEAS ENGINE 8


Worries discounted; offers a buying opportunity

The parliament has approved the 2015 Government of Indonesia (GoI) budget revisions at theend of February 2015, with a new revised target of excise tax of Rp145.7tn, or 24% higherYoY (2014: Rp117.45tn). The amount is around 10% of the total targeted tax revenue ofRp1489.3 tn.

Though there is no clarity thus far on how the new target will be achieved, the GoI stated thatthe increase will come from: (1) illegal cigarettes, and (2) a better tax collections mechanism, inaddition to the expected volume growth and revenue from the new duty that has beenimplemented since the beginning of the year.

We are sceptical that the GoI will be able to get revenue from illegal cigarettes given that 90%of cigarettes sold in Indonesia are kretek, which are only produced in Indonesia, and illegalcigarettes are mostly home-based industry for SKT products.

On tax collections, on the other hand, it is still possible to ask producers to pay in cash forbanderole purchases instead of providing a two-month credit. This might add around Rp10-15tn in additional revenue to the GoI book. However, if this happens, it will disrupt the cash flowof the cigarette producers for the month, unless it can be done through instalments.

Alternatively, the easiest way is to further increase the excise tax, even though that will hurtvolumes.

Figure 15: Gol excise tax revenue target Figure 16: Excise tax to total revenue and toGDP

Source: Ministry of Finance Source: Ministry of Finance

Sensitivity analysis on the excise tax and VAT increase

If the increase happens, we believe that GG has the ability to pass these through, as it hasconsistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to10% (from current 8.4%) and an excise duty rise to 5% will require price increases of 5% and

8%, respectively, to maintain profitability, assuming other things remain similar.Indonesia vs India – Why is it different?

India's cigarette sector has been underperforming the Indian market by 26% in the past oneyear, as the government has been implementing stricter measures on the sector, by increasingthe cigarette tax by over 35% within a span of ten months, and considering putting restrictionson sale of loose sticks of cigarettes. The Indian government has been looking to promotingpublic health by cutting down on smokers. The fear of that the happenings in India could getreplicated in Indonesia could have been behind the weakness Gudang Garam's shares. Theinvestors might have shied away as the GoI is targetting a higher revenue from excise tax.Nonetheless, in our view, the difference is that in India, excise tax revenue only accounts for~1% of total tax revenue, while in Indonesia, it accounts for about 10%. The GoI is looking toincrease tax, and not limiting the cigarette volume. Cigarette sale in India is around 100bn, athird of what is sold in Indonesia.

23 26 29 33 38

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IDEAS ENGINE 9


Turning cash flow positive

GG has a better net revenue margin now

With the better product mix (higher proportion on SKM FF) and price increases, GG's blendednet revenue margin (NRM) improved. NRM is calculated based on the revenue derived fromdeducting the excise and VAT costs. As of April 2015, GG's SKT (GG Merah) has an NRM of46.8%, and its SKM FF (GG FIM 45.1% and GG Surya at 43.7%), while the NRM for SKMLTLN (GG Mild 28% and GG Pro Mild 18.5%) is still half of that of SKM FF, and they areimproving. This is compared to the end of 1Q14, of 42.8% for SKT, 44.4% for GG FIM and43.8% for GG Surya (flat), while for SKM LTLN products, improvement is seen in GG Mild,from 23.2%, while Pro Mild is still lower at 18.5%.

In 1Q15, NRM is seen declining due to the rise in the excise tax, of which GG has yet to fullypassed on to the consumers, nevertheless, as seen historically, NRM will catch up in thefollowing quarters.

Figure 17: Net revenue of GG cigarettes Figure 18: Net revenue margin of GG cigarettes

Source: Company data Source: Company data

Helped by the stable clove price as well

We have seen clove prices (the main raw material for kretek cigarettes and mostly grown inIndonesia) rise over the last three years, due mainly to poor harvest. This has resulted in at leastthree events that changed the industry's dynamic: (1) decline in margins as clove pricesincreased, (2) decline in consumption of SKT cigarettes as SKT used more clove than SKM,thus becoming more expensive, (3) plently of small-sized SKT producers (such as home-basedindustry) closing down. In all, as a result, smokers switched to SKM FF products, among otherreason, as well as the aging profile of the SKT cigarettes.

There is no index available for the movement of clove prices as the planting and usage of cloveis mostly in Indonesia. Clove prices increased from Rp50K/kg in 2010 to Rp120K/kg in 2011,and peaked at Rp220/kg in 2012. In 2013 and 2014, clove prices came down and it sold atabout Rp140K/kg to Rp160K/kg. It has currently stabilised at about Rp130K/kg toRp140K/kg. Both clove and tobacco and other ingredients, accounted for about 27% of GG'stotal costs in 2014 (up from 23% in 2010). We estimate raw materials costs to account forabout 26% of total costs going forward. Note that clove and tobacco are purchased from thefarmers and have to be aged first, between three months to eighteen months, depending onthe quality, before they can be of use.

Coupled with the ability to gradually increase its pricing, GG's gross margin is expected toimprove from its lowest at 15.8% in 2007, to 20.5% in 2014. We estimating gross margin tobe at around 21-22% going forward. Gross profit is estimated to grow at 14% CAGR 15E-17E, from 11% CAGR 10-14. Figure 19: GG – cost breakdown Figure 20: GG – gross profit vs gross margin


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IDEAS ENGINE 10


Higher ad cost expected this year, but labour cost todecline

The largest part of GG's opex comprises transportation, freight, and advertising-related costs.The company does not provide a detailed break-up on these three items. In 2013, with thelaunch of its SKM LTLN (GG Pro Mild and GG Mild), GG started a more aggressive campaign,which pushed up its advertising costs. The company combined its transportation, freight, andadvertising costs together, which accounted for 37% of opex, or 3% of its total revenue in2013. In 2014, with no new significant product launch, and as it was an election period, itsmarketing campagin slowed down, leading to its advertising costs declining 14% YoY, or 2% ofits total revenue (28% of total opex). We expect the company's advertising events to be moreaggressive this year, as such, we assume the transportation, freight, and advertising costs toaccount for 2.7% of total revenue this year, or up 50% YoY, and increase to 3% goingforward. We've also taken into consideration the rise in fuel prices (which has been increasedtwice as of Apr 15).

GG booked a one-off charge on employee compensation due to an early retirementprogramme, amounting to ~Rp500 bn in FY14. This was the result of weak demand for SKTproducts, which is more labour intensive, while SKM products are continuing to grow. Itsnumber of employees were down 16% YoY at 36,456 at the end of 2014. As such, GG's

employee compensation increased 49% YoY in FY14, accounting for 37% of its total opex(2.7% of total sales), as compared to 28% of total opex, or 2.2% of its total sales in FY13. Weexpect employee compensation to decline 10% this year and account for 2.2% of its revenueor 29% of its opex.

As i ts gross margin improves, GG's operating margin also improved to 13.2% in 2014, from12% in 2013, but is yet to reach 16.3% seen in 2011 (its lowest was 8.3% in 2006). We areexpecting the operating margin to be at 13.6% this year with the operating profit expected towitness a 14% CAGR over 2015-17E, from a 10% CAGR during 2010-14. Figure 21: GG – opex breakdown, 2013 Figure 22: GG – opex breakdown, 2014

Source: Company data Source: Company data

Figure 23: GG – number of employees in

each quarter

Figure 24: GG – operating profit vs

operating margin


Lower capex, free cash flow turns positive

Since 2012, GG has spent a significant amount on capex, totalling Rp14 tn. This includespurchase of machineries for production and packaging, and for both replacement as well as forexpansion on the production of SKM. It is also building new warehouses and has resorted to

modernisation to create a better vertically integrated production facility. We view that themassive capex cycle is completed, with its capex estimated to be at Rp3 tn this year, and Rp2tn each in the next two years, which mostly is for capex maintenance. With the lower capex andcoupled with the operational improvement, GG's free cash flow is expected to turn positive thisyear onwards. We continue to assume a 38% dividend payout ratio, which will provide adividend yield of around 2%.

For GG, debt is short term, mostly to finance its working capital, whereas a majority is topurchase raw materials. We estimate debt to be at Rp17 tn this year, from Rp18 tn last year,with the debt-to-equity still at a low 0.45x.

In all, we estimated GG's net profit to grow at a much higher rate – at 17% CAGR over2015E-17E, as compared to 7% CAGR during 2010-14. Its net margin is expected to be8.6% this year, and recover to 9.4% in 2017E, from 7.8% in 2013.

Transportation,freight,

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IDEAS ENGINE 11


Figure 25: GG – capex is lesser goingforward

Figure 26: GG – gross fixed asset


Figure 27: GG – net debt vs debt-to- equity Figure 28: GG – free cash flow to turn

positive this year onwards


Figure 29: GG – net profit vs YoY growth Figure 30: GG – net margin


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IDEAS ENGINE 12


Upgrade TP to Rp66,800

We have adjusted our estimates on GG on the back of higher margins that result from a betterproduct mix as well as its ability to increase prices, and as clove prices remain stable. Thecompany also has lower employee costs thanks to its product mix. At the same time, capex isexpected to decline as it completes its three-year expansion programme. Free cash flow isturning positive starting this year, with an improving net margin.

Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which isbelow -1 std dev. In our view this is not warranted given the company's improving performance.We upgrade our rating to OUTPERFORM with a target price of Rp66,800 (up from Rp53,500),implying a 20x 2015E P/E, which is equal to its average historical relative P/E of 20x. Thisvaluation is also similar to the weighted average of forward earnings of cigarette companiesglobally, whose earnings are lower than GG's. GG's earnings are estimated to witness a 17%CAGR over 2015E-17E. Compared with the other consumer companies in Indonesia, which onaverage trade at about 30-35x forward earnings, we believe GG's valuation is warranted, giventhat its revenue and costs are mostly IDR-based, and thus immune to the fluctuation inexchange rates.

Figure 31: Gudang Garam—change in earnings

Old New Change YoY growthRpbn 2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E

Revenue 73,783 83,296 74,518 83,340 1.0% 0.1% 14.3% 11.8%

Gross profit 15,279 17,422 15,893 17,869 4.0% 2.6% 18.8% 12.4%

Operating profit 9,688 10,963 10,214 11,470 5.4% 4.6% 19.1% 12.3%

Net profit 6,026 6,947 6,423 7,398 6.6% 6.5% 19.6% 15.2%

Margin analysis:

Gross 20.7% 20.9% 21.3% 21.4%

Operating 13.1% 13.2% 13.7% 13.8%

Net 8.2% 8.3% 8.6% 8.9%

ey assumptions:

Sales volume (bn sticks) 86 90 85 90 -0.4% -0.3% 6.0% 5.2%

SKM 78 82 77 81 -1.6% -1.6% 6.1% 5.2%SKM FF 61 62 63 65 3.4% 4.5% 3.8% 3.1%

SKM LTLN 17 20 13 16 -19.9% -21.2% 18.7% 15.5%

SKT 8 8 9 9 11.1% 13.2% 4.9% 4.9%

ASP (Rp/stick) 842 905 856 910 1.6% 0.5% 8.0% 6.3%

SKM 858 921 874 931 1.9% 1.0% 7.4% 6.5%

SKT 681 734 689 718 1.1% -2.1% 14.3% 4.3%

Source: Company data, Credit Suisse estimates

Figure 32: GG trades at below five-year historical relative P/E

Source: Company data, Credit Suisse estimates

Figure 33: Global tobacco comparables valuations Company Ticker Rtg Mkt cap Price Target Target

PE (x)

P/E (x) EPS growth EV/EBITDA

(x)

ROE (%)

US$ mn l.c l.c 15E 15E 16E 15E 16E 15E 16E 15E 16E

Phillip Morris

International

PM N 131,642 85 80 19.1 20.2 19.1 -

16.4%

6.1% 14.4 12.8 26 28

British American

Tobacco

BATS.L n.a. 104,596 3,765 n.a. n.a. 18.0 16.7 0.5% 7.7% 14.4 14.1 56 64

Japan Tobacco 2914.T O 61,932 4,109 4,300 18.9 18.1 16.5 13.8% 10.2% 10.8 11.2 18 18

ITC.Ltd ITC.BO U 43,425 352 384 31.3 28.0 25.0 11.9% 11.3% 20.6 20.5 34 35

Imperial Tobacco IMT.L n.a. 46,471 3,258 n.a. n.a. 16.4 15.6 -2.3% 5.1% 12.0 12.2 35 33

KT&G Corp 033780.KS N 11,620 91,600 88,000 13.9 14.5 13.5 -3.8% 7.4% 9.5 9.1 13 13

Gudang Garam GGRM.JK O 7,795 52,200 66,800 20.0 15.6 13.6 19.6% 15.2% 9.9 11.1 17 17

Swedish Match SWMA.ST U 6,221 270 230 15.7 18.4 18.1 10.8% 1.5% 13.6 14.3 247 139

BAT Malaysia BATO.KL O 5,315 67 76 22.8 20.3 19.5 5.3% 3.9% 14.7 15.2 149 144Wismilak Inti

Makmur

WIIM.JK n.a. 80 492 n.a. n.a. 6.9 5.3 32.9% 31.0% n.a. n.a. 19 19

Weighted average 20.8 19.5 18.1 -1.5% 7.6% 14.0 13.6 39 39

*Share price as of 20 April 2015

Source: Credit Suisse estimates, IBES estimates

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Rel PE Avg Rel PE STDEV +1 STDEV -1



IDEAS ENGINE 13


Figure 34: Indonesia consumer comparables valuations Ticker Company Rtg Mkt cap Price TP Target PE(x) P/E (x) EPS growth (%) EV/EBITDA (x) ROE (%)

US$ mn l.c l.c 15E 15E 16E 15E 16E 15E 16E 15E 16E

China 24.5 24.7 21.7 13.0% 13.2% 13.3 12.0 22 23

1044.HK Hengan International N 15,325 97 88 23.8 26.2 22.9 16.0% 14.5% 15.4 13.7 23 24

3331.HK Vinda International O 2,007 16 15 21.7 22.9 19.6 14.6% 17.0% 14.0 12.4 12 13

0151.HK Want Want China N 14,279 8 1 21.2 21.0 19.1 10.0% 9.8% 13.7 12.7 30 30

0322.HK Tingyi N 12,293 17 2 29.6 27.2 23.7 12.7% 14.8% 10.0 9.0 14 15

Indonesia 24.4 35.7 33.3 13.7% 16.1% 23.9 22.9 68 7KLBF.JK Kalbe Farma N 6,772 1,860 1,350 25.3 34.8 29.0 17.2% 20.1% 23.8 19.9 23 24

GGRM.JK Gudang Garam O 7,547 50,500 66,800 20.0 15.1 13.1 19.6% 15.2% 9.6 8.6 17 17

ICBP.JK Indofood CBP O 6,499 14,350 11,800 22.2 27.0 22.7 17.2% 24.2% 17.3 14.5 20 21

INDF.JK Indofood Sukses O 5,013 7,350 8,100 15.8 14.4 n.a. 15.5% n.a. 5.1 n.a. 16 n.a.

UNVR.JK Unilever Indonesia U 22,594 38,125 21,500 28.2 50.0 44.3 9.4% 12.8% 34.8 31.1 123 120

India 39.5 40.7 33.7 10.9% 19.5% 30.3 25.3 56 58

COLG.BO Colgate-Palmolive India O 4,515 2,077 2,210 52.9 49.7 39.1 19.5% 27.1% 35.2 27.2 82 80

DABU.BO Dabur India N 7,668 273 255 41.2 44.1 35.8 18.0% 23.1% 36.1 29.8 33 34

EMAM.BO Emami Ltd O 3,779 1,041 1,110 51.8 48.6 37.2 20.8% 30.6% 41.3 31.6 41 42

GLSM.BO GlaxoSmithkline O 4,235 6,300 6,160 43.3 44.3 35.3 -11.3% 25.6% 43.0 33.1 28 29

GOCP.BO Godrej Consumer N 6,371 1,171 1,210 44.4 42.9 33.8 22.9% 27.1% 31.3 25.9 21 22

HLL.BO Hindustan Unilever Ltd O 32,388 937 955 51.8 50.8 40.7 3.2% 24.8% 38.3 31.0 103 108

ITC.BO ITC Ltd U 45,070 352 320 26.1 28.7 25.8 11.0% 11.3% 21.2 19.2 34 35

MRCO.BO Marico Ltd O 4,292 416 420 46.0 45.6 34.9 21.4% 30.7% 31.4 24.8 36 36

NEST.BO Nestle India U 10,767 6,986 6,100 41.1 47.1 40.1 19.0% 17.3% 28.2 24.8 56 64

Japan 28.3 26.7 23.9 11.1% 15.0% 10.8 11.0 43 45

2897.T Nissin Foods Holdings n.a. 5,285 5,690 n.a. n.a. 29.8 26.8 9.2% 11.4% 11.1 10.6 640 665

2914.T Japan Tobacco n 62,188 4,122 4,300 20.2 18.1 16.7 6.9% 16.0% 9.1 9.6 18 18

4452.T Kao n 24,948 5,911 7,000 40.0 33.1 29.5 11.7% 14.7% 10.7 11.6 12 13

4911.T Shiseido n 7,554 2,249 1,690 37.4 49.0 42.1 -31.2% 18.3% 13.7 13.1 5 6

8113.T Unicharm n 15,521 3,068 3,000 37.3 38.6 34.3 48.0% 11.3% 16.2 14.8 11 11

Korea 23.0 23.2 20.1 22.4% 13.6% 13.6 12.3 18 17

033780.KS KT&G Corp N 11,660 91,600 88,000 13.9 14.5 13.5 -3.8% 7.4% 9.5 9.1 13 13

051900.KS LG Household & Healthcare O 12,945 894,000 900,000 31.3 31.1 26.1 45.9% 19.3% 17.3 15.2 22 21

Malaysia 22.8 20.4 19.6 5.3% 3.9% 14.8 14.5 149 144BATO.KL BAT Malaysia O 5,370 68 76 22.8 20.4 19.6 5.3% 3.9% 14.8 14.5 149 144

Phillipines 22.3 34.3 29.3 13.9% 16.6% 22.2 19.3 20 22

URC.PS Universal Robina Corp. n.a. 10,609 215 n.a. n.a. 36.8 30.8 17.6% 19.5% 23.1 19.6 22 24

EMP.PS Emperador Inc. U 4,098 11 9 22.3 27.8 25.5 4.2% 9.1% 19.9 18.4 16 16

Taiwan 18.2 19.4 17.2 27.7% 12.7% 8.5 7.7 15 16

1216.TW Uni-President N 8,908 50.50 47.40 18.2 19.4 17.2 27.7% 12.7% 8.5 7.7 15 16

Weighted average 30.2 31.8 27.6 12.2% 16.0% 19.5 17.4 46 48

*Share price as of 20 April 2015. Source: Credit Suisse estimates, IBES estimates



IDEAS ENGINE 14


Companies Mentioned (Price as of 22-Apr-2015)

BAT Malaysia (BATO.KL, RM65.5) British American Tobacco (BATS.L, 3734.0p) Colgate-Palmolive India (COLG.BO, Rs1957.95) Dabur India (DABU.BO, Rs266.5) Emami Ltd (EMAM.BO, Rs1003.65) Emperador Inc. (EMP.PS, P11.38) GlaxoSmithkline Consumer Healthcare (GLSM.BO, Rs6332.95) Godrej Consumer Products Ltd (GOCP.BO, Rs1127.9) Gudang Garam (GGRM.JK, Rp53,100, OUTPERFORM, TP Rp66,800) Hengan International (1044.HK, HK$95.85) Hindustan Unilever Ltd (HLL.BO, Rs905.1) ITC Ltd (ITC.BO, Rs343.7) Imperial Tobacco (IMT.L, 3293.0p) Indofood CBP (ICBP.JK, Rp14,250) Indofood Sukses Makmur (INDF.JK, Rp7,400) Japan Tobacco (2914.T, ¥4,264) KT&G Corp (033780.KS, W92,900) Kalbe Farma (KLBF.JK, Rp1,900) Kao (4452.T, ¥6,145) LG Household & Healthcare (051900.KS, W894,000) Marico Ltd (MRCO.BO, Rs396.45) Nestle India (NEST.BO, Rs6847.85) Nissin Foods Holdings (2897.T, ¥5,760) Philip Morris International (PM.N, $83.69) Shiseido (4911.T, ¥2,381) Swedish Match (SWMA.ST, Skr270.2) Tingyi (0322.HK, HK$16.74) Uni-President Enterprises (1216.TW, NT$50.4) Unicharm (8113.T, ¥3,142)

Unilever Indonesia (UNVR.JK, Rp40,350) Universal Robina Corp. (URC.PS, P217.0) Vinda International Holdings Ltd (3331.HK, HK$15.68) Want Want China Holdings Ltd. (0151.HK, HK$8.48) Wismilak Inti (WIIM.JK, Rp493)



IDEAS ENGINE 15


Disclosure Appendix

Important Global Disclosures

I, Ella Nusantoro, certify that (1) the views expressed in this report accurately reflect my personal views abou t all of the subject companies and securities and (2) no part of my compensation was, is or will be di rectly orindirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Gudang Garam (GGRM.JK)

GGRM.JK Closing Price Target Price

Date (Rp) (Rp) Rating

31-Jul-12 56,350 50,000 U

31-Oct-12 49,150 44,600

26-Feb-13 49,450 46,100

15-Jul-13 45,600 40,300

17-Sep-13 43,000 37,500

06-Apr-14 48,900 46,200

07-Apr-14 50,200 46,200 N

31-Oct-14 57,750 53,500

* Asterisk signifies initiation or assumption of coverage.

UNDERPERFORM

NEUTRAL

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of whi ch are generated by Credit Suisse's investment

banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all com panies co vered by the analy st within the relev ant secto r, withOutperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total returnrelative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractiveinvestment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2n d October 2012 U.S. and Canadianratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12-monthrolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total return relative to the average total return of the relevant country or regional be nchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse'sengagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/orvaluation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.



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*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 43% (53% banking clients)

Neutral/Hold* 38% (50% banking clients)

Underperform/Sell* 16% (44% banking clients)

Restricted 3%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, resp ectively; however, the meanings are not the same,as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinionsstated herein.

Credit Suisse's policy is only to publish investment research that is impartial, independent, clear, fair and not misleading. For more detail please refer to Credit Suisse's Policies for Managing Conflicts of Interest in connectionwith Investment Research: http://www.csfb.com/research-and-analytics/disclaimer/managing_conflicts_disclaimer.html

Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Gudang Garam (GGRM.JK)

Method: Our target price of Rp66,800/share for Gudang Garam implies a 20x P/E 2015E at the target price, with an estimated 17% estimated earnings growth over the next two years. We derive our target price

using discounted cash flow (DCF) method, where we are assuming 9.8% WACC on 5 .2% terminal growth. Our weighted average cost of cap ital (WACC) assumes a 7.5% risk-free rate, 0.5 beta, 5% risk premium,and a 28% corporate tax.

Risk: The following risks could impede the achievement of our Rp66,800/share target price for Gudang Garam. (1) Change in government regulation: There is no specific timeline as to when the GoI (Government of

Indonesia) is going to revise excise tax regulations. In the past two years, the tax has been revised yearly, and was favourable to SKM (machine-made cigarettes) and tier 1 companies (large-size producers,producing more than 2 bn sticks), narrowing the gap in tax to the SKT (hand rolled cigarettes) and mid and smaller size producers. (2) Strong demand for low tar, low nicotine: GG's brands in the low-tar, low-nicotine category include the Nusantara series and Surya Slim series, and last year it launched Surya Slim Premium and Surya Pro Mild. However, its presence in this category is relatively small. Low-tar, low-nicotine kretek cigarettes have been posting strong growth in the past decade, particularly for younger smokers in urban areas. (3) Consumers down-trading to less expensive cigarettes: If the GoI increases theexcise tax, cigarettes will become more expensive, encouraging consumers to downtrade to cheaper products. (4) Weak consumer purchasing power: Although the consumer confidence index, surveyed by BankIndonesia, showed that the confidence of Indonesian consumers is rising, concerns about the possibility of higher inflation (due to the recent increase in electricity tariffs) might disrupt consumer affordability. (5)Rising interest rates: GG's debt is usually Rupiah-denominated and in the form of short-term loans. This is used for raw materials (clove) purchasing, where typically the harvest season peaks at the end of 4Q and1Q (depending on the weather). A rise in interest rates would increase its interest expense, hence affecting its profitability.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (0322.HK, 051900.KS, 1044.HK, 1216.TW, 2914.T, 8113.T, BATO.KL, BATS.L, EMP.PS, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) currently is, or wasduring the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (2914.T, BATO.KL, BATS.L, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, URC.PS) within the past 12 months



IDEAS ENGINE 17


Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T, 4911.T,8113.T, BATO.KL, BATS.L, COLG.BO, EMAM.BO, EMP.PS, GLSM.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS) within the next 3 months.

As of the date of this report, Credit Suisse makes a market in the following subject companies (PM.N).

Credit Suisse may have interest in (GGRM.JK, ICBP.JK, INDF.JK, KLBF.JK, UNVR.JK)

Credit Suisse may have interest in (BATO.KL)

As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (033780.KS, IMT.L).

Credit Suisse has a material conflict of interest with the subject company (051900.KS) . Credit Suisse is acting as exclusive financial advisor to LG Household & Health Care Ltd. for the acquisition of Everlife Co., Ltd. from

CLSA Sunrise Capital, L.P.Credit Suisse has a material conflict of interest with the subject company (BATS.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchaseagreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.

Credit Suisse has a material conflict of interest with the subject company (IMT.L) . Credit Suisse Securities (Europe) Limited is acting as sole sponsor and joint financial adviser to Imperial in respect of their purchaseagreement with Reynolds to acquire certain brands in the US and other assets which are being disposed of as a consequence of the acquisition of Lorillard by Reynolds.

For other important disclosures concerning companies featured in this report, including price charts, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (GGRM.JK, 0151.HK, 0322.HK, 033780.KS, 051900.KS, 1044.HK, 1216.TW, 2914.T, 3331.HK, 4452.T,4911.T, 8113.T, BATO.KL, BATS.L, COLG.BO, DABU.BO, EMAM.BO, EMP.PS, GLSM.BO, GOCP.BO, HLL.BO, ICBP.JK, IMT.L, INDF.JK, ITC.BO, KLBF.JK, MRCO.BO, NEST.BO, PM.N, SWMA.ST, UNVR.JK, URC.PS)within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investmentdealer would be required to make if this were its own report.

For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.

Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (IMT.L).

The following disclosed European company/ies have estimates that comply with IFRS: (BATS.L, IMT.L, SWMA.ST).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (1216.TW, 2914.T, BATO.KL, BATS.L, IMT.L, NEST.BO, PM.N, URC.PS) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. researchanalysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASDRule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

PT Credit Suisse Securities Indonesia .............................................................................................................................................. Ella Nusantoro

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.



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Gudang Garam (GGRM JK)

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