GG-Credit Suisse

Equity Research Asia Pacific / Indonesia Tobacco 23 April 2015

Gudang Garam (GGRM.JK) UPGRADE RATING IDEAS ENGINE SERIES

The Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas.

Looking through the smoke In the right spot. A mix of strong brand name, pricing power, product mix, and volume growth in a tough environment makes GG a strong contender in the Indonesian consumer space, while its costs and revenues are almost entirely rupiah based, making it immune to the currency volatility. The fact that the stock has fallen 13% YTD and underperformed the market by 17% makes it an attractive investment opportunity. Upgrade to OUTPERFORM (from Neutral). Worries discounted; offers a buying opportunity. The market has overreacted 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 has consistently done in the past. Turning cash flow positive. The favourable product mix in favour of machine-made cigarettes should boost margins. Further, lower raw material costs, and lower employee costs should provide a fillip to GG's profitability. This improved profitability coupled with completed expansions resulting in lower capex is turning GG free cash flow positive starting this year. Upgrade TP to Rp66,800. Our valuation puts GG firmly below its peers globally and within Indonesia's consumer space, with higher growth rate (17% CAGR over 2015E-17E). GG has traded at a relative P/E of 1.25x over the past five years which gives us a target P/E of 20x, similar to the weighted 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 fiveyear historical average relative P/E… 1.8 1.7 1.6 1.5 1.4 1.3

Avg (2010-15): 1.25

1.2 1.1 1.0

0.9 0.8 Apr-10

Apr-11

Rel PE

Apr-12

Avg Rel PE

Apr-13

STDEV +1

Apr-14

Apr-15

STDEV -1

Source: Company data, Bloomberg Bbg/RIC GGRM IJ / GGRM.JK Price (22 Apr 15 , Rp) 53,100 Rating (prev. rating) O (N) TP (prev. TP Rp) 66,800 (53,500) Shares outstanding (mn) 1,924.09 Est. pot. % chg. to TP 26 Daily trad vol - 6m avg (mn) 0.9 52-wk range (Rp) 63700.0 - 48100.0 Daily trad val - 6m avg (US$ mn) 3.7 Mkt cap (Rp/US$ bn) 102,169.1/ 7.9 Free float (%) 23.6 Performance 1M 3M 12M Major shareholders Suryaduta Investama Absolute (%) 4.8 (9.2) 1.1 (69.29%) Relative (%) 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 93,440 EBITDA (Rp bn) 7,721 10,018 11,854 13,243 15,117 Net profit (Rp bn) 4,329 5,369 6,423 7,398 8,798 EPS (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 3,915 EPS growth (%) 7.8 24.0 19.6 15.2 18.9 P/E (x) 23.6 19.0 15.9 13.8 11.6 Dividend yield (%) 1.5 1.5 2.0 2.4 2.8 EV/EBITDA (x) 14.7 11.9 10.1 8.9 7.7 P/B (x) 3.5 3.1 2.7 2.4 2.1 ROE (%) 15.5 17.2 18.2 18.5 19.4 Net debt(cash)/equity (%) 39.3 49.8 46.3 36.3 29.6 Note 1: Gudang Garam is Indonesia's leading tobacco company. It produces the full range of kretek cigarettes including hand-made (SKT) and machine-made (SKM) cigarettes, both in full flavoured and low-tar, low-nicotine, under brands such as GG Merah, GG Surya and GG FI.

RESEARCH ANALYSTS Ella Nusantoro 62 21 255 37917 [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 of this report. Investors should consider this report as only a single factor in making their investment decision.

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Focus charts

856

700

90%

600

30% 20%

640

9%

590 537

500

10% 400

0% 2010

2011

2012

2013 SKM

2014

2015E

2016E

25%

8%

20%

7%

15%

6% 2010

2017E

30%

2011

2012

2013

2014

ASP (Rp/stick)

SKT

2015E 2016E 2017E YoY growth (%)

FIM 12

Surya 16

Pro Mild 16

GG Mild 16

1Q15

90%

Apr-15

90%

90%

88%

4Q14

84%

40%

3Q14

40%

84%

45%

10%

706

83%

12%

35%

60% 50%

50%

11%

793

800

13%

2Q14

70%

910

1Q14

900

80%

972

CAGR 10-14: 10.2% CAGR 15E-17E: 6.6%

4Q13

1000

10%

3Q13

10%

2Q13

10%

10%

12%

1Q13

16%

4Q12

16%

3Q12

90%

17%

Figure 3: …with margins by products seen improving

2Q12

100%

Figure 2: …and it has pricing power

1Q12

Figure 1: GG has the preferred mix of machine-made from hand-rolled…

Merah 12

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

2400

6000

20%

5429

19%

2200

4000

14% 13%

1400

12%

1200

11%

1000

2000 3000

2911

3000

2000

2000

2000

Operating profit (Rp bn)

Operating margin (%)

Source: Company data, Credit Suisse estimates

IDEAS ENGINE Gudang Garam (GGRM.JK)

1648

1004

1000 52 0 -1000

1646 1183

-2000

1000

10% 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

(in Rp bn)

1600

(in Rp bn)

16% 15%

3599

3000

17%

1800

4199

4000

5000

18%

2000

5000

5625

-2035

-3000 0 2010

2011

2012

2013

2014

Source: Company data, Credit Suisse estimates

2015E 2016E 2017E

-4000 2010

2011

2012

-3336

-3378

2013

2014

2015E 2016E 2017E

Source: Company data, Credit Suisse estimates

2

Looking through the smoke In the right spot

Upgrade TP to Rp66,800

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). This benefits 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 Indonesia Consumer Survey 2015, where smokers said they continued to prefer SKM to SKT.

Historically, GG has traded at 1.25x relative P/E. That multiple has dropped to 1x, which is below -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 from Rp53,500/share), implying a 20x 2015E P/E, which is equal to its average historical relative P/E of 20x. This valuation is also similar to the weighted average of forward earnings of cigarette companies globally, 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 on average trade at about 30-35x forward earnings, we believe GG's valuation is warranted, given that its revenue and costs are mostly IDR-based, and thus immune to the fluctuation in exchange rates.

We expect GG to continue to gain market share in machine-rolled cigarettes (SKM). We are looking at GG to have a 5% volume growth on 7% higher ASP over the next two years, with the market share in 2014 estimated to have been at about 23%. We believe that these assumptions are higher than what the consensus is building into the valuations. GG has demonstrated its ability to pass on prices, with its ASP witnessing a 10% CAGR in the last four years, and despite the 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 total targeted tax revenue of Rp1,489.3 tn. Even though there is no clarity thus far on how the new target will be achieved, the GoI stated that the increase will come from: (1) clamping down on illegal 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 has consistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to 10% (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 of higher margins that result from a better product mix as well as its ability to increase prices, and as clove prices remain stable. GG also has lower employee costs thanks to its product mix. At the same time, capex is expected to decline as it completes its three-year expansion programme. Free cash flow is turning positive starting this year, with an improving net margin.

IDEAS ENGINE Gudang Garam (GGRM.JK)

3

Gudang Garam (GGRM.JK) Price (22-Apr-15,Rp) Market Cap (Rpmn) Rating Target Price (Rp) EPS FY1E (Rp) EPS FY2E (Rp) EPS FY3E (Rp) Source: Credit Suisse Estimates, IBES Income Statement Sales revenue Cost of goods sold SG & A Other operating exp./(inc.) EBITDA Depreciation & amortisation EBIT Net interest expense/(inc.) Recurring PBT Taxes Profit after tax Minority interests Reported net profit Net profit (Credit Suisse) Cash Flow EBIT Net interest Tax paid Working capital Other cash & non-cash items Operating cash flow Capex Free cash flow to the firm Other investment/(outflows) Investing cash flow Dividends paid Net borrowings Financing cash flow Total cash flow Net change in cash Balance Sheet Cash & cash equivalents Current receivables Inventories Other current assets Current assets Property, plant & equip. Other non-current assets Total assets Accounts payable Short-term debt Current provisions Other current liabilities Current liabilities

IDEAS ENGINE Gudang Garam (GGRM.JK)

53100.0 102169072.8 Current Value OUTPERFORM 66800.00 3338.06 3845.00 4572.56

Previous Value NEUTRAL 53500.00 3131.88 3610.66 4073.42

2014FYA 65,186 51,806 4,855 -1,493 10,018 1,440 8,578 1,372 7,206 1,811 5,395 27 5,369 5,369 2014FYA 8,578 -1,372 -1,811 -5,224 42 213 -5,625 -5,412 662 -4,963 -1,539 5,101 3,562 -1,188 -1,188 2014FYA 1,588 1,532 34,739 673 38,533 18,973 715 58,221 989 18,147 166 4,480 23,783

2015FYE 74,518 58,625 5,679 -1,640 11,854 1,640 10,214 1,608 8,606 2,151 6,454 32 6,423 6,423 2015FYE 10,214 -1,608 -2,151 -4,696 1 1,760 -3,000 -1,240 637 -2,363 -2,040 1,046 -994 -1,597 -1,597 2015FYE 1,599 1,943 39,783 663 43,988 20,333 78 64,399 1,168 19,000 198 5,019 25,385

2016FYE 83,340 65,472 6,399 -1,774 13,243 1,774 11,470 1,557 9,913 2,478 7,435 37 7,398 7,398 2016FYE 11,470 -1,557 -2,478 -2,961 181 4,655 -2,000 2,655 -12 -2,012 -2,441 -1,789 -4,230 -1,587 -1,587 2016FYE 1,568 2,275 42,913 742 47,498 20,559 90 68,147 1,214 17,000 228 5,523 23,964

2017FYE 93,440 72,992 7,238 -1,907 15,117 1,907 13,210 1,421 11,789 2,947 8,842 44 8,798 8,798 2017FYE 13,210 -1,421 -2,947 -5,090 442 4,194 -2,000 2,194 -17 -2,017 -2,811 -741 -3,552 -1,375 -1,375 2017FYE 1,615 2,652 48,179 832 53,278 20,652 107 74,037 1,273 16,000 271 6,065 23,609

Non-current provisions Total liabilities Shareholders' equity Minority interests Total liabilities & equity Per Share Shares (wtd avg.) (mn) EPS (Credit Suisse) (Rp) DPS (Rp) BVPS (Rp) Operating CFPS (Rp) Earnings Sales revenue EBIT Net profit EPS EBITDA EBIT Pre-tax profit Net profit Valuation P/E P/B Dividend yield (%) P/CF EV/sales EV/EBITDA EV/EBIT Returns ROE ROIC Asset turnover (x) Interest burden (x) Tax burden (x) Financial leverage (x) Gearing Net debt/equity (%) Net debt/EBITDA (x) Interest cover (x)

1,209 24,992 33,093 135 58,221 2014FYA 1,924 2,790 800.00 17,199 110.75 2014FYA 17.6 28.2 24.0 24.0 15.4 13.2 11.1 8.2 2014FYA 19.0 3.1 1.5 479.4 1.8 11.9 13.8 2014FYA 17.2 14.1 1.1 0.8 0.7 1.8 2014FYA 49.8 1.65 6.25

1,402 1,613 1,873 26,787 25,578 25,481 37,476 42,433 48,420 135 135 135 64,399 68,147 74,037 2015FYE 2016FYE 2017FYE 1,924 1,924 1,924 3,338 3,845 4,573 1,060 1,268 1,461 19,477 22,054 25,165 914.58 2,419 2,180 2015FYE 2016FYE 2017FYE 14.3 11.8 12.1 19.1 12.3 15.2 19.6 15.2 18.9 19.6 15.2 18.9 15.9 15.9 16.2 13.7 13.8 14.1 11.5 11.9 12.6 8.6 8.9 9.4 2015FYE 2016FYE 2017FYE 15.9 13.8 11.6 2.7 2.4 2.1 2.0 2.4 2.8 58.1 22.0 24.4 1.6 1.4 1.2 10.1 8.9 7.7 11.7 10.3 8.8 2015FYE 2016FYE 2017FYE 18.2 18.5 19.4 14.6 15.2 16.4 1.2 1.2 1.3 0.8 0.9 0.9 0.8 0.7 0.8 1.7 1.6 1.5 2015FYE 2016FYE 2017FYE 46.3 36.3 29.6 1.47 1.17 0.95 6.35 7.37 9.29 Source: Company data, Credit Suisse Estimates

4

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 reported by Nielsen, saw volume decline 0.8% YoY to 349bn sticks. Thus, GG is estimated to have had a market share of 23% in 2014, up from 21% in the previous year. The decline in the industry volume has mostly been due to SKT (hand-rolled kretek cigarettes) products, comprising only 10% of GG's total volume, and down 14% YoY. On the other hand, the industry volume for SKM FF (machine made fully flavoured kretek cigarettes) was up 6% YoY and SKM low-tar, low-nicotine (LTLN) was up 3% YoY. GG is on the right spot, with a majority (90% of total volume) of its products being SKM-based. Its SKM FF (accounts for 76% of total volume) saw a 6% YoY volume growth last year, and SKM LTLN grew 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) 1Q15 earnings release stated that the volume for Indonesia's cigarette industry grew 5.9% YoY to 78bn, 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 total volume), while volume for SKM grew 2% YoY (accounting for 75% of total volume). GG has yet to release its 1Q15 earnings, which is expected by the end of the month. Figure 7: GG – volume vs volume growth YoY 100 94

95 90

90 80

80

77 73

75 70

68

100%

6%

90%

69

60%

3%

50% 40%

20%

60

0%

10%

2012

2013

Sales vol (bn sticks)

2014

2015E

2016E

2017E

YoY growth (%)

16%

16%

12%

10%

10%

10%

10%

83%

84%

84%

88%

90%

90%

90%

90%

2010

2011

2012

2014

2015E

2016E

2017E

30%

1%

2011

17%

70%

65 2010

0% 2013 SKM

Source: Company data, Credit Suisse estimates

IDEAS ENGINE Gudang Garam (GGRM.JK)

By age group, the younger generations preferred SKM LTLN or white cigarettes, while the older generations preferred SKT, and SKM FF is favoured by all age groups. Of our respondents in the age group below 30, 36% are fans of SKM LTLN, as compared to 32% preferring SKM FF and 14% liking SKT products.

80%

4%

2%

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 at 22% (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. We also think that the aging profile that SKT has, might have resulted in a shift towards the younger profile that preferred SKM. White cigarettes (SPM) continue to be the least popular type, 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.

Figure 8: GG – volume composition

7%

5%

85

85

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

SKT

Source: Company data, Credit Suisse estimates

5

Figure 9: Credit Suisse Indonesia Consumer Survey - cigarette consumption by cigarette types Age Monthly income % of Total Urban Rural Java Non 18-29 30-45 46-55 56-65 Rp7.5mn respondents Java 7.5mn 2014 SKM FF SKM LTLN SKT White Others 2013 SKM FF SKM LTLN SKT White Others 2012 SKM FF SKM LTLN SKT White Others 2011

33 28 22 6 12

34 31 20 7 8

32 22 24 5 17

36 24 25 7 7

27 38 8 7 20

32 36 14 9 9

36 25 21 4 13

32 15 33 5 15

29 17 33 4 17

37 18 27 10 8

12 30 35 8 15

72 5 13 3 7

32 30 24 6 7

31 28 23 8 9

36 30 24 2 7

34 29 24 7 6

28 7 40 5 19

35 37 11 9 9

28 25 28 6 13

33 13 41 4 9

43 13 33 0 11

35 28 23 2 12

21 26 34 9 9

87 4 6 1 3

31 23 26 7 14

28 28 26 9 8

34 17 25 6 18

34 30 22 10 5

28 16 27 7 22

30 32 17 13 8

32 24 29 8 7

34 8 36 3 18

25 3 51 3 19

33 29 19 3 16

18 31 28 11 11

85 4 6 3 2

SKM FF SKM LTLN SKT White Others 2010 SKM FF SKM LTLN SKT White Others

31 25 30 5 10

32 27 24 7 10

30 19 36 1 13

34 36 19 4 6

27 12 35 7 19

27 35 22 6 10

33 22 31 6 9

35 7 41 3 14

38 8 30 4 20

31 33 17 3 15

25 32 29 6 8

92 3 2 1 2

39 23 27 4 7

38 26 28 5 4

41 13 30 2 14

41 33 17 4 5

34 14 37 3 11

37 33 20 4 6

40 18 32 5 5

41 6 33 6 14

29 10 45 0 15

42 29 17 3 9

27 34 29 6 4

96 1 2 1 1

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. Unlike in other countries, cigarette producers in Indonesia have been unable to pass through the increase in excise tax immediately, instead choosing to implement it gradually. This is because cigarette in Indonesia, at the street level, is still mostly sold by sticks instead of by packs, which we 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 tax increase is 5.5% for SKT (hand-rolled cigarettes) and 10.7% for SKM (machine-made cigarettes) for Tier 1 producers (those that produce more than 2bn sticks a year). Excise cost for SKT is now at Rp319/stick and Rp457/stick for SKT, inclusive of the 10% regional tax. In addition 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 (sticks)

(Rp/stick)

Old

New

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%

440-549 511-588

7.1%- 245 265 8.2% 16.1%

Below Rp588, min at Rp511

Chg Old New

Chg

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%

Below Rp425, min at Rp520 I

(Hand-rolled, kretek cig) II

IIIA

nicotine kretek cigarettes, and SKT is hand-rolled kretek cigarettes. Source: Credit Suisse Indonesia Consumer Survey 2015

Tax/stick (Rp)

SPM

SKT

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

MRP (Minimum Retail Price)

IIIB

> 2 bn

Above Rp825

Below Rp825, min at Rp606 350 mn - 2 Above Rp379 bn Rp385-Rp417

345-444 425-520 17.1%- 195 220 12.8% 23.2% 749

825

10.1% 275 290 5.5%

550-749 606-825 10.1%- 205 220 7.3% 10.2% 379 417 10.0% 130 140 7.7%

349-379 385-417 10.0%- 120 125 4.2% 10.3% 50 mn - 350 Min price at Rp286 250 286 14.4% 80 85 6.3% mn < 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 Gudang Garam (GGRM.JK)

6

Overall, GG has increased its average price by about 3-6% YTD, depending on the product. By comparison, 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 higher than that of Indofood's noodle prices (post the end of price war). GG's blended ASP increased at 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… 1000 900

Figure 12: …to keep up with the tax increase 972

CAGR 10-14: 10.2% CAGR 15E-17E: 6.6%

910

12%

856

11%

793

800

10%

706 700

600

13%

640

9%

590 537

8%

776

800

750

CAGR 10-14: 11.0% CAGR 15E-17E: 6.2%

700

14%

582

600

12%

544

550 500 450

16%

688

644

650

10%

463 425

8%

400

500

7%

400

6% 2010

2011

2012

2013

2014

ASP (Rp/stick)

6%

350 300

4% 2010

2015E 2016E 2017E

2011

2012

2013

2014

2015E 2016E 2017E

Tax cost/stick (Rp)

YoY growth (%)

YoY growth (%)

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

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

Figure 14: GG – ASP comparables – noodles vs cigarettes (YoY growth)

1800

45%

CAGR 08-14 Noodles: 8%, GG-SKM: 10%, GG-SKT: 9%

1600

18%

730

40%

1400

35%

1200

30%

1000

25%

800

20%

600

15%

400

10%

200

5%

0

0% 2008

2009

Noodles (Rp/pack)

2010

2011

GG - SKM (Rp/stick)

2012

2013

2014

GG - SKT (Rp/stick)

Source: Gudang Garam, Indofood, CS estimates

IDEAS ENGINE Gudang Garam (GGRM.JK)

2008

2009

Noodles (Rp/pack)

2010

2011

GG - SKM (Rp/stick)

2012

2013

2014

GG - SKT (Rp/stick)

Source: Gudang Garam, Indofood, CS estimates

7

Worries discounted; offers a buying opportunity The parliament has approved the 2015 Government of Indonesia (GoI) budget revisions at the end of February 2015, with a new revised target of excise tax of Rp145.7tn, or 24% higher YoY (2014: Rp117.45tn). The amount is around 10% of the total targeted tax revenue of Rp1489.3 tn. Though there is no clarity thus far on how the new target will be achieved, the GoI stated that the increase will come from: (1) illegal cigarettes, and (2) a better tax collections mechanism, in addition to the expected volume growth and revenue from the new duty that has been implemented 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 illegal cigarettes 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 for banderole purchases instead of providing a two-month credit. This might add around Rp10-15 tn in additional revenue to the GoI book. However, if this happens, it will disrupt the cash flow of 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 hurt volumes. Figure 15: Gol excise tax revenue target 33%

146

140 120

23% 95

100

60 23

14% 45 38

25%

24% 20%

51

66

16% 14%

15%

11% 8%

20

12% 11% 10% 10%

10% 10%

10%

9%

9% 9%

9% 9%

9%

10%

9%

IDEAS ENGINE Gudang Garam (GGRM.JK)

1.2%

9% 1.1%

8%

8%

1.0%

% excise to total tax revenue

2014

2015E

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

0.9%

2002

2014

2015E

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

5%

Source: Ministry of Finance

1.3%

10%

0

YoY growth (%)

India's cigarette sector has been underperforming the Indian market by 26% in the past one year, as the government has been implementing stricter measures on the sector, by increasing the cigarette tax by over 35% within a span of ten months, and considering putting restrictions on sale of loose sticks of cigarettes. The Indian government has been looking to promoting public health by cutting down on smokers. The fear of that the happenings in India could get replicated in Indonesia could have been behind the weakness Gudang Garam's shares. The investors 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 to increase tax, and not limiting the cigarette volume. Cigarette sale in India is around 100bn, a third of what is sold in Indonesia.

1.4%

10%

7%

Excise tax revenue (Rp tn)

Indonesia vs India – Why is it different?

1.5% 11% 11%

2001

40

11% 33 26 29

57

35% 30%

117

77

18%

80

108

If the increase happens, we believe that GG has the ability to pass these through, as it has consistently done in the past. We ran a sensitivity analysis that suggests a VAT increase to 10% (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.

Figure 16: Excise tax to total revenue and to GDP

2000

160

Sensitivity analysis on the excise tax and VAT increase

% excise to GDP

Source: Ministry of Finance

8

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 blended net revenue margin (NRM) improved. NRM is calculated based on the revenue derived from deducting the excise and VAT costs. As of April 2015, GG's SKT (GG Merah) has an NRM of 46.8%, and its SKM FF (GG FIM 45.1% and GG Surya at 43.7%), while the NRM for SKM LTLN (GG Mild 28% and GG Pro Mild 18.5%) is still half of that of SKM FF, and they are improving. This is compared to the end of 1Q14, of 42.8% for SKT, 44.4% for GG FIM and 43.8% 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%.

There is no index available for the movement of clove prices as the planting and usage of clove is 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 at about Rp140K/kg to Rp160K/kg. It has currently stabilised at about Rp130K/kg to Rp140K/kg. Both clove and tobacco and other ingredients, accounted for about 27% of GG's total costs in 2014 (up from 23% in 2010). We estimate raw materials costs to account for about 26% of total costs going forward. Note that clove and tobacco are purchased from the farmers and have to be aged first, between three months to eighteen months, depending on the quality, before they can be of use. Coupled with the ability to gradually increase its pricing, GG's gross margin is expected to improve from its lowest at 15.8% in 2007, to 20.5% in 2014. We estimating gross margin to be at around 21-22% going forward. Gross profit is estimated to grow at 14% CAGR 15E17E, from 11% CAGR 10-14.

Figure 17: Net revenue of GG cigarettes

Figure 19: GG – cost breakdown

25%

30%

2000

20%

20%

1000

15%

10%

FIM 12

Surya 16

Merah 12

Pro Mild 16

1Q15

GG Mild 16

Source: Company data

Apr-15

4Q14

3Q14

2Q14

1Q14

4Q13

3Q13

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

0

FIM 12

Surya 16

Pro Mild 16

GG Mild 16

1Q15

3000

Apr-15

40%

4Q14

50%

30%

3Q14

35%

4000

2Q14

5000

1Q14

60%

4Q13

40%

3Q13

6000

2Q13

70%

1Q13

45%

4Q12

7000

3Q12

80%

2Q12

50%

Merah 12

Source: Company data

Helped by the stable clove price as well

Figure 20: GG – gross profit vs gross margin 25000

25% 20449

20000

24%

17824

23%

15755

(in Rp bn)

Figure 18: Net revenue margin of GG cigarettes

8000

1Q12

(in Rp/stick)

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

15000

10000

13380 8866

10129

22%

10874 21%

9185

20%

5000

19%

0% -10%

2007 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E

0 Raw materials Indirect production costs Cost of other sales

Direct labor Excise duty & VAT Others

Source: Company data, Credit Suisse estimates

18% 2010

2011

2012

2013

Gross profit (Rp bn)

2014 2015E 2016E 2017E Gross margin (%)

Source: Company data, Credit Suisse estimates

We have seen clove prices (the main raw material for kretek cigarettes and mostly grown in Indonesia) rise over the last three years, due mainly to poor harvest. This has resulted in at least three events that changed the industry's dynamic: (1) decline in margins as clove prices increased, (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-based industry) closing down. In all, as a result, smokers switched to SKM FF products, among other reason, as well as the aging profile of the SKT cigarettes.

IDEAS ENGINE Gudang Garam (GGRM.JK)

9

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 the launch 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, and advertising costs together, which accounted for 37% of opex, or 3% of its total revenue in 2013. In 2014, with no new significant product launch, and as it was an election period, its marketing campagin slowed down, leading to its advertising costs declining 14% YoY, or 2% of its total revenue (28% of total opex). We expect the company's advertising events to be more aggressive this year, as such, we assume the transportation, freight, and advertising costs to account for 2.7% of total revenue this year, or up 50% YoY, and increase to 3% going forward. We've also taken into consideration the rise in fuel prices (which has been increased twice as of Apr 15). GG booked a one-off charge on employee compensation due to an early retirement programme, amounting to ~Rp500 bn in FY14. This was the result of weak demand for SKT products, which is more labour intensive, while SKM products are continuing to grow. Its number 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. We expect employee compensation to decline 10% this year and account for 2.2% of its revenue or 29% of its opex. As its gross margin improves, GG's operating margin also improved to 13.2% in 2014, from 12% in 2013, but is yet to reach 16.3% seen in 2011 (its lowest was 8.3% in 2006). We are expecting the operating margin to be at 13.6% this year with the operating profit expected to witness a 14% CAGR over 2015-17E, from a 10% CAGR during 2010-14. Figure 21: GG – opex breakdown, 2013

Depreciation 4%

Office supplies, repairs and maintenance 15%

Others 16% Transportation, freight, advertising 37%

Employee's compensation 28%

Source: Company data

IDEAS ENGINE Gudang Garam (GGRM.JK)

Figure 22: GG – opex breakdown, 2014

Depreciation 6%

Office supplies, repairs and maintenance 13%

Others 16%

Figure 23: GG – number of employees in each quarter

Figure 24: GG – operating profit vs operating margin 2400

47000

20% 19%

2200

45000

18%

2000

43000

17% 16%

1800

15% 1600

41000

14% 13%

1400

39000

12%

1200

37000

11%

1000

10% 1Q10 3Q10 1Q11 3Q11 1Q12 3Q12 1Q13 3Q13 1Q14 3Q14

35000

1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14

Higher ad cost expected this year, but labour cost to decline

Source: Company data, Credit Suisse estimates

Operating profit (Rp bn)

Operating margin (%)

Source: Company data, Credit Suisse estimates

Lower capex, free cash flow turns positive Since 2012, GG has spent a significant amount on capex, totalling Rp14 tn. This includes purchase of machineries for production and packaging, and for both replacement as well as for expansion 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 the massive capex cycle is completed, with its capex estimated to be at Rp3 tn this year, and Rp2 tn each in the next two years, which mostly is for capex maintenance. With the lower capex and coupled with the operational improvement, GG's free cash flow is expected to turn positive this year onwards. We continue to assume a 38% dividend payout ratio, which will provide a dividend yield of around 2%. For GG, debt is short term, mostly to finance its working capital, whereas a majority is to purchase 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 over 2015E-17E, as compared to 7% CAGR during 2010-14. Its net margin is expected to be 8.6% this year, and recover to 9.4% in 2017E, from 7.8% in 2013.

Transportation, freight, advertising 28%

Employee's compensation 37%

Source: Company data

10

Figure 25: GG – capex is lesser going

Figure 26: GG – gross fixed asset

forward 6000

5429

40000

5625

35926 31926 28926

30000

4000 3000

2911

3000

in Rp bn

(in Rp bn)

33926

35000

5000

2000

2000

2000

20000

1646

15000

1183

1000

23301

25000 17872 13314

14960

10000

0 2010

2011

2012

2013

2014

5000

2015E 2016E 2017E

2010

2011

2012

2013

2014

2015E 2016E 2017E

Source: Company data, Credit Suisse estimates

Source: Company data, Credit Suisse estimates

Figure 27: GG – net debt vs debt-to- equity

Figure 28: GG – free cash flow to turn

positive this year onwards 20000

0.60

18000

16559

5000

17401 15432

16000

14385

0.50

11575

0.30

4000

2000

0.20

2011

2012

2013

2014

Net debt (Rp bn)

0

-4000

Debt-to-equity (x)

2010

10000

7398

7000

6423

6000

4014

4000

10%

-15%

2000

-20% 2013

Net profit (Rp bn)

2014

2014

2015E 2016E 2017E

11%

12% 11%

10%

9%

9%

9%

9%

8%

8%

-5%

-10%

2012

-3378

2013

15%

0%

4329

3000 2011

-3336

5%

5369

4894 4146

12%

25% 20%

8000

2012

Figure 30: GG – net margin 30%

8798

2011

Source: Company data, Credit Suisse estimates

Figure 29: GG – net profit vs YoY growth 9000

-2035

-3000

2015E 2016E 2017E

Source: Company data, Credit Suisse estimates

2010

1004 52

-2000 0.10

2010

1648

1000

-1000

1434

0

5000

(in Rp bn)

6879 5069

6000

2000

0.40

10000 8000

3599

3000

14000 12000

4199

4000

8%

8%

7%

2015E 2016E 2017E YoY growth (%)

Source: Company data, Credit Suisse estimates

IDEAS ENGINE Gudang Garam (GGRM.JK)

6% 2010

2011

2012

2013

2014

2015E

2016E

2017E

Source: Company data, Credit Suisse estimates 11

Upgrade TP to Rp66,800 We have adjusted our estimates on GG on the back of higher margins that result from a better product mix as well as its ability to increase prices, and as clove prices remain stable. The company also has lower employee costs thanks to its product mix. At the same time, capex is expected to decline as it completes its three-year expansion programme. Free cash flow is turning 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 is below -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. This valuation is also similar to the weighted average of forward earnings of cigarette companies globally, 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 on average trade at about 30-35x forward earnings, we believe GG's valuation is warranted, given that its revenue and costs are mostly IDR-based, and thus immune to the fluctuation in exchange rates.

1.8 1.7 1.6 1.5 1.4 1.3 1.2 1.1 1.0

0.9 0.8 Apr-10

Apr-11

Rel PE

New 2015E

2016E

Change

YoY growth

2015E 2016E

2015E 2016E

Company

Ticker

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%

Gross

20.7%

20.9%

21.3%

21.4%

Phillip Morris PM International British American BATS.L Tobacco Japan Tobacco 2914.T

Operating

13.1%

13.2%

13.7%

13.8%

ITC.Ltd

8.2%

8.3%

8.6%

8.9%

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

3.8%

3.1%

SKM LTLN

17

20

13

16

-19.9% -21.2%

8

8

9

9

11.1% 13.2%

ASP (Rp/stick)

842

905

856

910

1.6%

SKM

858

921

874

931

1.9%

SKT

681

734

689

718

Margin analysis:

3.4%

4.5%

Rtg Mkt cap US$ mn

ITC.BO

Imperial Tobacco IMT.L

Key assumptions:

SKT

Apr-13

Apr-14

STDEV +1

Apr-15

STDEV -1

Figure 33: Global tobacco comparables valuations

Rpbn

Net

Apr-12

Avg Rel PE

Source: Company data, Credit Suisse estimates

Figure 31: Gudang Garam—change in earnings Old

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

Price l.c

N 131,642

85

80

n.a. 104,596

3,765

n.a.

EPS growth 15E

19.1 20.2 19.1

16.4% n.a. 18.0 16.7 0.5%

16E

EV/EBITDA ROE (%) (x) 15E 16E 15E 16E

6.1%

14.4 12.8

26 28

7.7%

14.4 14.1

56 64

O

61,932

4,109

4,300

18.9 18.1 16.5 13.8% 10.2%

10.8 11.2

18 18

U

43,425

352

384

31.3 28.0 25.0 11.9% 11.3%

20.6 20.5

34 35

n.a.

46,471

3,258

n.a.

n.a. 16.4 15.6 -2.3%

5.1%

13.9 14.5 13.5 -3.8%

7.4%

12.0 12.2

033780.KS

N

11,620 91,600 88,000

Gudang Garam

GGRM.JK

O

7,795 52,200 66,800

20.0 15.6 13.6 19.6% 15.2%

Swedish Match

SWMA.ST

U

6,221

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

3.9%

14.7 15.2 149 144

n.a.

80

492

n.a.

270

4.9%

4.9%

0.5%

8.0%

6.3%

*Share price as of 20 April 2015

1.0%

7.4%

6.5%

Source: Credit Suisse estimates, IBES estimates

1.1% -2.1%

14.3%

4.3%

230

n.a.

5.3%

6.9 5.3 32.9% 31.0%

20.8 19.5 18.1 -1.5% 7.6%

9.5

35 33

KT&G Corp

Wismilak Inti WIIM.JK Makmur Weighted average

18.7% 15.5%

Target Target P/E (x) PE (x) l.c 15E 15E 16E

9.1

13 13

9.9 11.1

17 17

n.a.

n.a.

19 19

14.0 13.6

39 39

Source: Company data, Credit Suisse estimates

IDEAS ENGINE Gudang Garam (GGRM.JK)

12

Figure 34: Indonesia consumer comparables valuations Ticker

Company

Rtg

Mkt cap

Price

TP

Target PE(x)

US$ mn

l.c

l.c

15E

China

P/E (x) 15E

16E

EPS growth (%)

EV/EBITDA (x)

15E

15E

24.5

24.7

21.7

13.0%

16E 13.2%

ROE (%)

16E

15E

16E

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

24.4

35.7

33.3

13.7%

16.1%

23.9

22.9

68

7

23.8

19.9

23

24 17

Indonesia KLBF.JK

Kalbe Farma

N

6,772

1,860

1,350

25.3

34.8

29.0

17.2%

20.1%

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

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

39.5

40.7

33.7

10.9%

19.5%

30.3

25.3

56

58

India 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

28.3

26.7

23.9

11.1%

15.0%

10.8

11.0

43

45

9.2%

11.4%

11.1

10.6

640

665

Japan 2897.T

Nissin Foods Holdings

n.a.

5,285

5,690

n.a.

n.a.

29.8

26.8

2914.T 4452.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

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

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

22.8

20.4

19.6

5.3%

3.9%

14.8

14.5

149

144

22.8

20.4

19.6

5.3%

3.9%

14.8

14.5

149

144

22.3

34.3

29.3

13.9%

16.6%

22.2

19.3

20

22

Korea

Malaysia BATO.KL

BAT Malaysia

O

5,370

68

76

Phillipines URC.PS

Universal Robina Corp.

EMP.PS

Emperador Inc.

n.a.

10,609

215

n.a.

n.a.

36.8

30.8

17.6%

19.5%

23.1

19.6

22

24

U

4,098

11

9

22.3

27.8

25.5

4.2%

9.1%

19.9

18.4

16

16

18.2

19.4

17.2

27.7%

12.7%

8.5

7.7

15

16

18.2

19.4

17.2

27.7%

12.7%

8.5

7.7

15

16

30.2

31.8

27.6

12.2%

16.0%

19.5

17.4

46

48

Taiwan 1216.TW

Uni-President

N

8,908

Weighted average

50.50

47.40

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

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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)

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Disclosure Appendix Important Global Disclosures I, Ella Nusantoro, certify that (1) the views expressed in this report accurately reflect my personal views about all of the subject companies and securities and (2) no part of my compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. 3-Year Price and Rating History for Gudang Garam (GGRM.JK) GGRM.JK Date 31-Jul-12 31-Oct-12 26-Feb-13 15-Jul-13 17-Sep-13 06-Apr-14 07-Apr-14 31-Oct-14

Closing Price (Rp) 56,350 49,150 49,450 45,600 43,000 48,900 50,200 57,750

Target Price (Rp) 50,000 44,600 46,100 40,300 37,500 46,200 46,200 53,500

Rating U

N

* Asterisk signifies initiation or assumption of coverage. U N D ERPERFO RM N EU T RA L

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 which 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 covered by the analyst within the relevant sector, with Outperforms 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 return relative to the analyst's coverage universe which consists of all companies c overed by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attrac tive, and Underperforms the least attractive investment 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 Canadian ratings 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-month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshol d replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +1015% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japa nese 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's engagement 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/or valuation: 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. IDEAS ENGINE Gudang Garam (GGRM.JK)

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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 se ctors.

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 definit ions 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 opinions stated 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 connection with 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 capital (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, lownicotine 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, lownicotine 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 the excise 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 Bank Indonesia, 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 and 1Q (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 was during 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

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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 purchase agreement 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 purchase agreement 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 investment dealer 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. research analysts 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 NASD Rule 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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