Buy. Gudang Garam Tbk (GGRM) Proves Outstanding Performance. NH Korindo Sekuritas Indonesia. Dec 2019 TP (IDR) 88,650.

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1 Tbk (GGRM) Proves Outstanding Performance Company Report Sep 18, 2018 GGRM s Sales Grows Fantastically GGRM posted the fantastic sales of 15.0% in 2Q18 from IDR20.2 trillion in 2Q17 into IDR23.32 trillion in 2Q18. The growth in sales was backed by the success of machine-made clove cigarette (SKM) the biggest contributor of 90% to the overall sales in posting the growth of 16.6% from IDR18.1 trillion in 2Q17 into IDR21.1 in 2Q18. The hand-made clove cigarette (SKT) experienced the decline of 2.4% in sales from IDR1,8 trillion in 2Q17 into IDR1.79 trillion in 2Q18. Net Profit Soars 35% GGRM s net profit soared by 35% from IDR1.23 trillion in 2Q17 into IDR1.66 trillion in 2Q18. 2Q18 s net profit was higher by 23.5% than 2Q17 s net profit of IDR1.34 trillion we estimate. The catalyst driving such positive surprise was the hike in EBIT margin from 2Q18 s estimate of 8.7% into 2Q18 s realization of 10.0%. The hike sent 2Q18 s net profit margin to settle at 7.1%. The efficiency was attributable to the ads. and transportation expense to 2Q17 sales of 4.2% sliding into 3.7% to 2Q18 sales. Revision of Estimated Profit Margin We estimate that in 2018 GGRM s full-year sales growth remains stable at around 9% with the hike in the revision of net profit margin from 9.2% in the prior report to 9.6%. Target Price IDR88,650 We use an estimate of forward P/E of 16.0x (the 3-year average) as the basis of valuation method to obtain the target price. The target price implies a 2019E P/E of 17.7x. Now, GGRM is traded at a 2018E P/E of 16.4x. Buy Dec 2019 TP (IDR) 88,650 Consensus Price (IDR) 84,866 TP to Consensus Price +4.5% vs. Last Price +19.2% Shares data Last Price (IDR) 74,900 Price date as of Sep 13, wk range (Hi/Lo) 85,275 / 62,025 Free float (%) 23.8 Outstanding sh.(mn) 1,924 Market Cap (IDR bn) 145,172 Market Cap (USD mn) 9,834 Avg. Trd Vol - 3M (mn) 0.88 Avg. Trd Val - 3M (bn) Foreign Ownership 8.2% Consumer Staples Cigarette Bloomberg Reuters Share Price Performance GGRM IJ GGRM.JK Gudang Garam Tbk Summary (IDR bn) Please consider the rating criteria & important disclaimer E 2019F 2020F Sales 83,306 91,075 99, ,033 Sales growth 9.2% 9.3% 9.4% 9.4% EBITDA 13,122 14,381 15,934 17,448 Net Profit 7,754 8,736 9,662 10,641 EPS (IDR) 4,030 4,540 5,021 5,530 EPS growth 16.1% 12.7% 10.6% 10.1% BVPS (IDR) 21,926 23,867 26,288 29,218 EBITDA margin 15.8% 15.8% 16.0% 16.0% NPM 9.3% 9.6% 9.7% 9.8% ROE 18.4% 19.0% 19.1% 18.9% ROA 11.6% 12.5% 13.0% 13.6% ROIC 13.3% 14.2% 14.7% 15.2% P/E 20.8x 16.4x 14.8x 13.5x P/BV 3.8x 3.1x 2.8x 2.5x EV/EBITDA 13.7x 11.1x 9.9x 9.0x DPS (IDR) 2,600 2,600 2,600 2,600 Dividend yield 3.1% 3.5% 3.5% 3.5% Source: Company Data, Bloomberg, NHKS Research YTD 1M 3M 12M Abs. Ret. -8.7% -0.8% 5.9% 13.5% Rel. Ret. -1.1% -0.7% 8.2% 13.2% Joni Wintarja , ext:138 joni.wintarja@nhsec.co.id NH Korindo Sekuritas Indonesia

2 Performance Highlights GGRM Quarterly Sales 2Q16-2Q18 GGRM Sales Breakdown FY2018E SKM (Machine Made) Sales Trend 2Q16-2Q18 SKT (Hand Made) Sales Trend 2Q16-2Q18 GGRM SKM Volume (mn sticks) SKM Tier 1 Excise Tax (IDR) Source: Ministry of Finance, NHKS Research Page 22

3 2Q18 review (IDR bn) 2Q17 3Q17 4Q17 1Q18 2Q18 Actual Estimate y-y q-q surprise 3Q18E Sales 20,275 21,278 21,783 21,981 23,324 22, % 6.1% 2.4% 22,769 Gross Profit 4,030 4,692 5,103 4,413 4,576 4, % 3.7% 2.4% 5,032 Gross Margin 19.9% 22.0% 23.4% 20.1% 19.6% 19.6% -0.3% -0.5% 0.0% 22.1% EBIT 1,813 3,281 3,384 2,723 2,323 1, % -14.7% 17.6% 3,658 EBIT Margin 8.9% 15.4% 15.5% 12.4% 10.0% 8.7% 1.0% -2.4% 1.3% 16.1% EBITDA 2,346 3,833 4,019 3,260 2,831 2, % -13.1% 11.6% 3,892 EBITDA Margin 11.6% 18.0% 18.4% 14.8% 12.1% 11.1% 0.6% -2.7% 1.0% 17.1% Net Profit 1,235 2,293 2,336 1,892 1,663 1, % -12.1% 23.5% 2,594 Net Margin 6.1% 10.8% 10.7% 8.6% 7.1% 5.9% 1.0% -1.5% 1.2% 11.4% Source: Bloomberg, NHKS research Earnings revision (IDR bn) 2018E 2019F 2020F Sales -Revised 91,075 99, ,033 -Previous 91, , ,022 -Change -0.1% -0.7% -0.9% Gross Profit -Revised 19,403 21,220 23,224 -Previous 19,934 21,935 24,095 -Change -2.7% -3.3% -3.6% Gross Margin -Revised 21.3% 21.3% 21.3% -Previous 21.9% 21.9% 21.9% EBIT -Revised 12,434 13,626 14,912 -Previous 12,198 13,422 14,755 -Change 1.9% 1.5% 1.1% EBIT Margin -Revised 13.7% 13.7% 13.7% -Previous 13.4% 13.4% 13.4% EBITDA -Revised 14,381 15,934 17,448 -Previous 14,222 15,817 17,392 -Change 1.1% 0.7% 0.3% EBITDA Margin -Revised 15.8% 16.0% 16.0% -Previous 15.6% 15.8% 15.8% Net Profit -Revised 8,736 9,662 10,641 -Previous 8,409 9,364 10,384 -Change 3.9% 3.2% 2.5% Net Margin -Revised 9.6% 9.7% 9.8% -Previous 9.2% 9.3% 9.4% Page 33

4 Gudang Garam GGRM at A Glance GGRM is the leading producer of clove cigarettes (kretek) identical with Indonesia. As the world s fourth most populous nations inhabited by around 250 million people, Indonesia is home to the biggest and most varied consumers markets with the significant adult smoker percentage 67% of Indonesian adult men are smokers. GGRM dominates 20.8% domestic market shares with its well-known products; and has 67 area offices with 279 distribution points across Indonesia as well as 7,000 vehicles as sale units, including motorcycles to serve its markets. Its two kretek factories are located in Kediri and Gempol. Home to 249,000 inhabitants, Kediri is the regional trade heartland and the location of GGRM s headquarters. Meanwhile, its second kretek factory situated in Gempol, East Java, is only 50 km from Surabaya. The two factories prove a boon to responding to the demand for cigarettes. GGRM s Competitiveness in the Asia Pacific (Emerging Market) Categorized into cigarette company with topping 9 billion market capitalization, GGRM has the second cheapest P/E after KT&G Corp. However, it has a steep higher profit growth of 18.05%. Compared to ITC LTD, GGRM with virtually half of ITC valuation has ROE topping 20%. It makes GGRM a preferred stock pick having growth orientation and relatively cheap valuation. Asia Pacific Cigarette Company Company Market Sales Net Profit Asset Cap (USD mn) (USD mn) (USD mn) (USD mn) Net Profit Growth Net Margin ROE P/E P/BV Indonesia Gudang Garam HM Sampoerna 9,326 28,998 4,913 3,175 6,498 7, % 0.54% 9.3% 12.5% 20.9% 46.0% 17.0x 34.0x 3.4x 15.6x ITC Ltd VST Industries Ltd Godfrey Phillips India Ltd Kothari Products Ltd 51, , , , % 20.04% 15.94% % 26.1% 19.2% 6.9% 0.9% 22.8% 32.5% 9.2% 5.6% 32.9x 27.3x 31.8x 6.2x 7.1x 8.5x 2.8x 0.3x Malaysia British American Tobacco 2, % 15.6% 110.9% 22.0x 25.4x Pakistan Pakistan Tobacco Co Ltd 4, % 24.7% 82.7% 46.6x 33.2x % 34.0% 16.5% 17.8x 3.2x 12,503 9,346 4,114 1, % 25.9% 15.8% 11.1x 1.7x 1, % 50.0% 256.9% 15.3x 35.7x % % 6.0% 2.3% 23.4% 7.9% 7.7x 9.7x 1.4x 0.8x India Philippines PTFC Redevelopment Corp South Korea KT&G CORP Sri Lanka Ceylon Tobacco Co Plc Vietnam CAT LOI JSC NGAN SON JSC Source: Bloomberg Page 44

5 Multiple Valuation Forward P/E band Last 3 years Dynamic Forward P/E band Last 3 years Rating and Target Price Update Target Price Revision Date Rating Target Price Last Price Consensus vs Last Price vs Consensus 11/22/2017 Buy 97,825 (Dec 2018) 80,375 80, % +18.5% 04/13/2018 Buy 88,650 (Dec 2018) 74,200 88, % +0.1% 07/11/2018 Buy 88,650 (Dec 2018) 70,975 85, % +3.4% 09/18/2018 Buy 88,650 (Dec 2019) 74,400 84, % +4.5%, Bloomberg Analyst Coverage Rating Closing and Target Price Source: Bloomberg NH Korindo Sekuritas Indonesia (NHKS) stock ratings 1. Period: End of year target price 2. Rating system based on a stock s absolute return from the date of publication Buy : Greater than +15% Hold : -15% to +15% Sell : Less than -15% Page 55

6 Summary of Financials DISCLAIMER This report and any electronic access hereto are restricted and intended only for the clients and related entity of PT NH Korindo Sekuritas Indonesia. This report is only for information and recipient use. It is not reproduced, copied, or made available for others. Under no circumstances is it considered as a selling offer or solicitation of securities buying. Any recommendation contained herein may not suitable for all investors. Although the information here is obtained from reliable sources, it accuracy and completeness cannot be guaranteed. PT NH Korindo Sekuritas Indonesia, its affiliated companies, respective employees, and agents disclaim any responsibility and liability for claims, proceedings, action, losses, expenses, damages, or costs filed against or suffered by any person as a result of acting pursuant to the contents hereof. Neither is PT NH Korindo Sekuritas Indonesia, its affiliated companies, employees, nor agents liable for errors, omissions, misstatements, negligence, inaccuracy arising herefrom. All rights reserved by PT NH Korindo Securities Indonesia Page 66