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					Asia tobacco
CONSUMER RELATED
                                                                                                                EQ U I T Y R E S E A R C H




Still lighting up                                                                                      April 10, 2012



Prefer Indonesia and India
cigarette players

Action: Recommend switch from BAT Malaysia to Gudang Garam/ITC                                         Anchor themes
We analyse the Asia ex-Japan tobacco industry, with a focus mainly on                                  While facing increased
countries offering investible equity exposure to the sector: India, Indonesia,                         limitations in the developed
Korea and Malaysia. Overall, we find greater growth opportunities still exist                          world, tobacco is still a growing
in Indonesia and India, where regulations on tobacco are relatively lax                                industry in developing
compared with those in developed countries. For Korea and Malaysia, we                                 countries. Recent economic
believe the tobacco industry has passed its peak and is a ‘sunset industry’.                           improvement in several
                                                                                                       economies such as India and
Catalysts: Demographics and “rampant” smoking                                                          Indonesia should provide an
The large, young population in India and Indonesia has been driving                                    added boost for the tobacco
consumer industry (including cigarette) growth in these two markets. The                               industry.
male smoking ratio is on the higher side for both countries – 66% for
Indonesia and 31% for India, based on WHO data. Female smoking                                         Nomura vs consensus
incidence, on the other hand, is generally low (<5%).                                                  We are generally in line with
                                                                                                       consensus, except for KT&G
Robust economic growth provides further boost for the industry                                         (consensus Buy).
For Indonesia and India, affordability is the key to the cigarette industry’s
growth. With Indonesia and India registering robust GDP growth of 6.5%                                 Research analysts
and 7.1%, respectively, for 2011, we believe higher income growth will
                                                                                                       India Consumer Related
lead to increased cigarette consumption – both in volume and value.
                                                                                                       Manish Jain - NFASL
Regulatory environment remains favourable in some countries                                            manish.jain@nomura.com
                                                                                                       +91 22 4037 4186
We expect the trend of simplification in the tobacco excise tax system in
                                                                                                       Anup Sudhendranath - NSFSPL
Indonesia to benefit large tobacco names, which have been paying high                                  anup.sudhendranath@nomura.com
taxes all along. In India, regulatory risks mostly affect foreign players, with                        +91 22 4037 5406
the limitation for foreign direct investment. The regulatory environment in
                                                                                                       Indonesia Consumer Related
Korea remains relatively favorable for tobacco companies, but in Malaysia,
                                                                                                       Janni Asman - PTNI
the risk to volume and margin persists due to government-implemented                                   Janni.Asman@nomura.com
price caps and high excise duty hikes over the years.                                                  +62 21 2991 3345
                                                                                                       Wilianto Ie - PTNI
Valuation: Undemanding valuations for GG and ITC                                                       wilianto.ie@nomura.com
Our TP valuations for Gudang Garam (20x FY13F P/E) and ITC (27x                                        +62 21 2991 3341

FY13F P/E) suggest the shares are undemanding at current levels
                                                                                                       Malaysia Consumer Related
considering their growth potential. At its current 21x FY13F P/E, BAT
Malaysia looks expensive for its ~1% EPS growth with a risk to the                                     Tushar Mohata - NSM
                                                                                                       tushar.mohata@nomura.com
downside. We remain Neutral on KT&G.                                                                   +603 2027 6895

Fig. 1: Stocks for action                                                                              Archit Singhal - NSFSPL
                                                                                                       archit.singhal.1@nomura.com
                                            Price Target                    PE Up/Down-                +91 22 672 35537

 Company                Rating              (LCY) px(LCY)                FY13F      side     Tickers   South Korea Consumer Related
 BAT Malaysia           Reduce               56.2    44.5                 21.2     -21%     ROTH MK    Cara Song - NFIK
 Gudang Garam Buy                         59,450        75,000            14.9     26%      GGRM IJ    cara.song@nomura.com
                                                                                                       +82 2 3783 2328
 ITC                    Buy                    227          246           22.7       8%       ITC IN
 KT&G                   Neutral           76,100        86,000            10.5     13%     033780 KS
                                                                                                       See Appendix A-1 for analyst
Source: Bloomberg, Nomura estimates. Note: Pricing as of 3 April, 2012                                 certification, important
                                                                                                       disclosures and the status of
                                                                                                       non-US analysts.
Nomura | Asia tobacco                                                              April 10, 2012



Contents
     3        ‘Tobacconomics’
  




              3     India and Indonesia names are our preferred choices

           




              4     Demographics and smoking habit as base for growth

           




              4     Smoking is still ‘macho’ in most countries within the region

           




              5     Affordability vs. illicit trade

           




              6     Taxation impact

           




              6     AEJ cigarette valuation matrix

           




     7        British American Tobacco (M)
  




     15       Gudang Garam
  




     21       ITC
  




     26       KT&G Corp
  




     29       Appendix A-1
  




                                                                                             2
Nomura | Asia tobacco                                                                                 April 10, 2012



‘Tobacconomics’
The drivers of tobacco (and cigarette) consumption around the world are primarily
existing tobacco incidence, consumer affordability and demographics. In addition, given
that it is a highly regulated industry worldwide, tobacco’s growth trajectory is significantly
influenced by government policies, attitude and regulations.


India and Indonesia names are our preferred choices
Our analysis of tobacco industry dynamics in ASEAN countries and South Asia reveals
that:
• Tax regulation changes pose a lower risk for tobacco companies in Indonesia and
  Korea, given that tax as a percentage of retail price is already on the high side. Hence,
  we believe that most of the risk of volume shocks due to tax changes is already built in.
• Robust economic growth in countries such as India and Indonesia (GDP growth of
  7.1% for India and 6.5% for Indonesia in 2011) should result in higher purchasing
  power and benefit the tobacco industry, in our view.
• For countries with rampant smoking (high smoking ratio) among the population,
  affordability often affects the choice of tobacco brand rather than the choice of whether
  to smoke or to stop smoking.
• For tobacco names in countries that have a high current tobacco incidence, such as
  Malaysia, and easy access to neighbouring countries for potentially cheaper cigarettes,
  we believe those companies are likely to lose out to illicit tobacco trade given the
  relative ease of smuggling, as shown by a BAT Malaysia press release. We believe the
  tobacco industry in India faces a similar situation, although to a lesser extent.
• Barriers to entry in the tobacco industry in some countries (eg, India, Indonesia,
  Malaysia, and Korea) are higher than others. In Indonesia, the barriers to entry for non-
  clove cigarette manufacturers are high given that clove cigarettes are particularly
  popular in Indonesia. In India, the main barriers to entry are regulatory in nature, while
  in Korea, the main barrier to entry has been industry consolidation. In Malaysia, there is
  an oligopoly with all three of the world’s manufacturers (BAT, PMI and JT having a
  presence, and a stable market share, making it difficult for new entrants).

Fig. 2: Summary of findings and stocks for action
 Scope                               Indonesia             India             Korea      Malaysia
 Absolute volume growth                                                                 
 Tax change risk to volumes                                                             
 Economic growth                                                                        
 Illicit trade                                                                          
 Stock for action                  Gudang Garam             ITC              KT&G      BAT Malaysia

 Ticker                                GGRM IJ             ITC IN          033780 KS    ROTH MK

 Nomura Rating                           BUY               BUY             NEUTRAL       REDUCE

 Current price (3 Apr)                  59,450              227              76,100        56.2

 Target price                           75,000              246              86,000        44.5

 Upside / (Downside)                     26%                8%                13%         -21%

Source: AseanTobacco Tax Report Card 2012, IMF, WHO, Company data, Nomura estimates




                                                                                                                3
Nomura | Asia tobacco                                                                                                                                            April 10, 2012


Fig. 3: Regional comparison from an industry and stock-specific perspective
 Industry                                                           Indonesia                          India                          Korea                       Malaysia
 Growth                                                               Growing                      Growing                          Declining                     Declining
                                                                                               High (due to
                                                           High (due to clove                                       Relatively high (due to                 High (relatively
 Barrier of entry                                                                    government limitation
                                                                 uniqueness)                                        industry consolidation)                  consolidated)
                                                                                        on foreign player)
                                                                                    15% of overall tobacco                       48% (male)
 Cigarette penetration                                                     35%                                                                                        21.5%
                                                                                              consumption                       6% (female)
                                                      Clove cigarette (~90%          Cigarette, bidis, other
 Type of tobacco consumption                                                                                                        Cigarette                      Cigarette
                                                                     market)                    smokeless

                                                                             Different specific tax on
 Excise tax                                                                  each of 6 tier categories              W1,322/pack exercise
                                                          Different specific     (+ad valorem tax for               tax for regular product
                                                     nominal tax on each of       categories with size                   with retail price of Specific nominal flat tax
                                                         15 tier categories                   >65mm)                                W2,500            for all cigarettes

 Company                                                     Gudang Garam                                ITC                        KT&G                 BAT Malaysia
 Market share (volume)                                          22% (2010)                        75% (2011)                  59.5% (2011)         61% (of legal volume)
 Pricing power                                                      Higher                            Higher                       Limited                        Limited
 Competition                                                       Medium                               Low                           High              Mild (Oligopoly)
 Illegal cigarette circulation                                        Mild                          Rampant                           Rare                     Rampant
 Regulatory risk                                                      High                              High                          Mild                          High

 Rating                                                                     Buy                             Buy                       Neutral                        Reduce
 Net earnings growth (FY13F)                                               21%                             20%                           8%                              2%
 ROE (FY13F)                                                               25%                             37%                          16%                           155%
 Dividend yield (FY13F)                                                   4.3%                            3.7%                         5.3%                            4.5%
 Current price (LC/3Apr12)                                               59,450                             227                       76,100                            56.2
 Current PE valuation (x)                                                  16.2                            24.6                         10.7                            21.2
 Target price                                                            75,000                             246                       86,000                            44.5
 TP PE valuation (FY13F/X)                                                 20.4                            26.7                         12.1                            16.8
Source: Ministry of Finance of respectively country, Korea Ministry of Welfare, Indonesia Ministry of Health, World Health Organization, Asean Tobacco Tax Report Card 2012,
Nomura research



Demographics and smoking habit as base for growth
Based on 2010 per capita consumption of 1.6bn sticks for the ‘15-and-above’ population,
we believe that Indonesia has the potential for additional demand of 106bn sticks over
2010-15F. Our assumption is based on a population of 237mn (with 27% below 15 years
old), as per the 2010 Census data, and a smoking ratio of 35%.
India also shows considerable growth potential for the cigarette industry, with a
population of 1.2bn and, in our view, room for cigarette smoking as a percentage of
overall domestic tobacco consumption to climb from the current 15% as the government
is clamping down on other forms of tobacco which are not as taxed as cigarettes. Longer
term this will be reversed, although we acknowledge it will be a slow process
On our estimates, Malaysia’s demographics suggest cigarette volumes have the
potential to grow by around 200mn sticks per annum, which is much smaller in
comparison to the demand growth potential in India and Indonesia. The actual growth
has been negative for the past few years due to market share loss to illegal cigarettes,
according to BAT Malaysia company data.
Demographic changes also have an important impact on the growth outlook for
consumer-related companies in Korea. The shrinking smoking ratio among the younger
population points to less demand for tobacco and a subsequent rise in demand for
cosmetics and soft drinks, in our opinion.


Smoking is still ‘macho’ in most countries within the region
The percentage of male smokers, according to our analysis of the smoking trends within
the region, is more than that of female smokers. The percentage of female smokers




                                                                                                                                                                               4
Nomura | Asia tobacco                                                                                                  April 10, 2012


across the region is likely to rise, in our opinion, given the current low penetration and
the change in social perception that generally comes with modernisation.
Given that male smokers in Indonesia (~66%), Korea (~48%) and Malaysia (~46%)
already account for a high percentage of the smoking population, we see only a limited
rise in the numbers ahead. In India, however, the male smoking rate is only 31%, and we
believe this number can catch up with the numbers of other countries in the region.

Fig. 4: Smoking incidence by gender
   80             (%)
                                                 Male smoking         Female smo king
   70

   60

   50

   40

   30

   20

   10

    0
          Lao     Indo     Korea     Phil     Viet    M'sia     Cam      Thai    Brunei    In dia   Sin g


Source: ASEAN Tobacco Tax Report Card 2012, World Health Organization, Korea Ministry of Welfare, Indonesia Ministry
of Health, Nomura research



Affordability vs. illicit trade
Consumer affordability (which we measure based on the cost of 1,000 sticks of the most
popular cigarettes as % of per capita GDP) is stretched in India, which makes it
particularly vulnerable to illegal cigarettes.
Illegal cigarette penetration is high in Malaysia, at 36% of the overall market size,
according to a BAT Malaysia press release, due to a combination of porous borders and
a higher tax burden, which leads to higher absolute prices. This is likely to remain the
same in the future, unless there are strong measures to curb illegal trade, making future
industry growth prospects weak, in our view.
The absolute price of the “most popular” local brands in USD terms is lowest in
Cambodia, followed by the Philippines, Vietnam and Indonesia in the Asean region – we
believe this leads to increased smuggling of cigarettes into countries like Malaysia.
Illicit trade for cigarettes in Korea is rare due to the high affordability of cigarettes and
industry consolidation. Similarly, in Indonesia, it is relatively mild, based on our
estimates, due to lower absolute prices domestically and a relatively consolidated
industry with the top-4 players holding some 75% market share.




                                                                                                                                 5
Nomura | Asia tobacco                                                                                                                                                                                                                           April 10, 2012


Fig. 5: Absolute price of most popular local brand                                                                                       Fig. 6: Affordability index
  9                                                                                                                                            6%
                                                                     Price/pack (20 sticks in USD)                                                  5.4%
                                                                                                                                                                                                 Price (1000 sticks in USD)/GDP per capita
  8
                                                                                                                                               5%
  7

  6                                                                                                                                            4%            3.8%

  5
                                                                                                                                               3%                        2.7%
  4
                                                                                                                                                                                 2.0%     2.0%
  3                                                                                                                                            2%                                                    1.8%
                                                                                                                                                                                                              1.5%
  2                                                                                                                                                                                                                  1.0%    0.9%
                                                                                                                                               1%                                                                                     0.7%
  1                                                                                                                                                                                                                                             0.5%

  0                                                                                                                                            0%
       Sing         Brunei       M'sia       Korea           Thai       In dia    Ind o   Lao    Viet        Ph il     Cam                          India     Lao         Viet   M'sia    Indo       Thai     Cam    Sing    Brunei    Phil     Korea


Source: ASEAN Tobacco Tax Report Card 2012, Nomura research                                                                              Source: ASEAN Tobacco Tax Report Card 2012, IMF, Nomura research
Note: Price used is for the lowest price popular brand either local or foreign                                                           Note: Price used is for the lowest price popular brand either local or foreign



Taxation impact
For countries with high cigarette tax rates (>60% of the retail price), such as Korea and
Indonesia, we believe the tobacco industry is likely to see a relatively lower risk of further
tax hikes. In addition, a lower budget deficit and a higher excise contribution to tax
revenue in Indonesia may lower the regulatory risk on cigarette taxation, in our view.
In India and Malaysia, the cigarette tax rate is only 50% and 48% of the retail price,
respectively. Hence, we see room for the government to hike the tax rate further, which
we think could hurt tobacco sales volumes. Also, the cap on the retail price for Malaysian
cigarettes could lead to margin pressure for cigarette manufacturers.

Fig. 7: Tobacco tax (% of retail price),                                                           Fig. 8: Excise tax (% of tax revenue),                                                Fig. 9: Countries fiscal balance
2011                                                                                               2011*                                                                                 (%GDP), 2011
                                                                                                                                                                                          2
 80%                                                                                                    12                                                                                     (%)
                                                                                                              (%)
 70%                                                                                                                                                                                      1
                                                                                                        10
 60%                                                                                                                                                                                      0
                                                                                                        8
 50%                                                                                                                                                                                      -1

 40%                                                                                                    6                                                                                 -2

 30%                                                                                                                                                                                      -3
                                                                                                        4
 20%                                                                                                                                                                                      -4
                                                                                                        2
 10%                                                                                                                                                                                      -5
                                                     M'sia

                                                              Viet
                Korea
       Brunei




                                                                     Phil
                               Sing

                                      Indo

                                             India




                                                                            Cam
                        Thai




                                                                                  Lao




                                                                                                        0
                                                                                                                                                                                          -6
                                                                                                              M'sia*    Ind o   Phil    Thai     Sing   Ko rea*   India* **
                                                                                                                                                                                                 Sing       Korea*   Indo      Thai      Phil      M'sia


Source: ASEAN Tobacco Tax Report Card 2012,                                                        Source: CEIC, Indonesia Ministry of Finance,                                          Source: CEIC, Nomura Global Economics
Nomura research                                                                                    Singapore Ministry of Trade and Industry, Philippines
                                                                                                                                                                                         Note: *Korea 2011 fiscal balance is as per Nomura
                                                                                                   Bureau of Treasury
                                                                                                                                                                                         estimates
                                                                                                   Note: *As per 2010 for Malaysia, Korea, and India.
                                                                                                   **Instead of total excise duty, only cigarette-related
                                                                                                   tax considered in calculation for Singapore, Thailand
                                                                                                   and India



AEJ cigarette valuation matrix

Fig. 10: AEJ cigarette valuation

                                                                                          PE                             PB                    Dividend yield                    ROE           Target Up/Down-
 Company Rating                                      Price                        FY12F FY13F                 FY12F FY13F                      FY12F FY13F FY13F                                price      side                           Tickers
 BAT M'sia Reduce 56.2                                                             21.6         21.2                 34.3       31.8            4.4%              4.5% 155%                          44.5            -21%              ROTH MK
 G.Garam                       Buy                   59,450                        18.0         14.9                   3.9        3.5           3.3%              4.7%           25%           75,000                  26%              GGRM IJ
 ITC                           Buy                   227                           27.3         22.7                   8.5        8.2           2.5%              4.1%           37%                 246                    8%                  ITC IN
 KT&G                          Neutral 76,100                                      11.9         11.0                   1.9        1.7           5.0%              5.3%           16%           86,000                  13%            033780 KS
Note: Pricing as of 3 April, 2012
Source: Bloomberg, Nomura estimates




                                                                                                                                                                                                                                                           6
British American Tobacco (M)
BATO.KL ROTH MK                                                                                                  EQUITY RESEARCH

CONSUMER RELATED



                                                                                                       April 10, 2012
Better tobacco exposure elsewhere; Reduce                                                              Rating
                                                                                                                                     Reduce
Valuations expensive for limited                                                                       Remains

                                                                                                       Target price                MYR 44.50
growth; pricing-in an over-                                                                            Remains

                                                                                                       Closing price               MYR 56.20
optimistic scenario                                                                                    April 3, 2012

                                                                                                       Potential downside             -20.8%


Action: Industry fundamentals weak; switch to other regional plays                                     Anchor themes
Notwithstanding BAT Malaysia’s sound execution and market leadership,                                  Possible excise duty hikes
we remain bearish on the Malaysian tobacco industry as a whole – given                                 posing downside risk to legal
the government’s unpredictable excise duty policy, which puts volumes at                               tobacco industry volumes, high
a high risk of sudden corrections. With consumer affordability already                                 illicit trade occurrence, weaker
stretched, easy availability of smuggled cigarettes (~36% of overall                                   margins following the small-
market), and increasingly limited industry growth, we see better tobacco                               pack ban and stiff competition
plays in Indonesia and India. We reiterate Reduce and advise a switch to                               for a shrinking pie remain key
Gudang Garam (GGRM IJ, Buy, Rp59,450) or ITC (ITC IN, Buy, INR227).                                    negative themes for the
                                                                                                       industry.
Valuation: Recent outperformance has put the stock in overvalued
territory, in our view                                                                                 Nomura vs consensus
BAT Malaysia has risen 26% since September 2011, outperforming its                                     Our TP is 11% lower than
peer JTI and the KLCI by 30% and 16%, respectively, and even GGRM by                                   consensus. We think the Street
20%. Valuations look stretched at 22x FY12F P/E for a 1% earnings                                      is aggressive on industry
CAGR over FY11-14F, and dividend yield has dropped below -1SD. On                                      volumes, which might contract if
our estimates, the current price builds in no industry volume decline for the                          the excise duty were raised
next three years; we think this is overly optimistic as it is highly unlikely the                      again.
government would shy away from a duty hike over this time frame, given
excise revenues now account for 6.3% of total government revenues,                                     Research analysts

especially with the recent MYR2bn reduction in Petronas dividends. We
                                                                                                       Malaysia Consumer Related
believe the risk-reward ratio is skewed to the downside and reaffirm our
                                                                                                       Tushar Mohata - NSM
Reduce call.                                                                                           tushar.mohata@nomura.com
                                                                                                       +603 2027 6895
Catalysts
                                                                                                       Archit Singhal - NSFSPL
Any excise duty hike by the Malaysian government might lead to demand                                  archit.singhal.1@nomura.com
destruction and lower volumes and margins for BAT.                                                     +91 22 672 35537



31 Dec                               FY11              FY12F                FY13F              FY14F
Currency (MYR)                      Actual       Old     New        Old         New      Old    New

Revenue (mn)                        4,127      4,241    4,241     4,271     4,271      4,258   4,258
Reported net profit (mn)                 720    742      742        756         756     757     757
Normalised net profit (mn)               733    742      742        756         756     757     757
Normalised EPS                       2.57       2.60     2.60      2.65         2.65    2.65    2.65
Norm. EPS growth (%)                     2.4     1.3      1.3       1.8          1.8     0.2     0.2
Norm. P/E (x)                        21.9       N/A      21.6       N/A         21.2    N/A     21.2
EV/EBITDA (x)                        15.4       14.2     15.1      13.9         14.8    13.7    14.7
Price/book (x)                       37.2       N/A      34.2       N/A         31.7    N/A     29.5
Dividend yield (%)                       4.9    N/A       4.4       N/A          4.5    N/A      4.5
ROE (%)                             156.1      164.9    164.9     154.9     154.9      144.0   144.0   See Appendix A-1 for analyst
Net debt/equity (%)                  79.5       92.7     92.7      75.8         75.8    59.4    59.4   certification, important
Source: Company data, Nomura estimates
                                                                                                       disclosures and the status of
                                                                                                       non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | British American Tobacco (M)                                                                                          April 10, 2012



Key data on British American Tobacco (M)
Income statement (MYRmn)                                                              Relative performance chart (one year)
Year-end 31 Dec                           FY10     FY11    FY12F    FY13F    FY14F
Revenue                                   3,965    4,127    4,241    4,271    4,258
Cost of goods sold                       -2,477   -2,635   -2,719   -2,729   -2,771
Gross profit                              1,489    1,492    1,522    1,542    1,487
SG&A                                       -479     -495     -503     -507     -452
Employee share expense
Operating profit                         1,010      998    1,018    1,035     1,035

EBITDA                                   1,067    1,065    1,089    1,109     1,117
Depreciation                               -57      -67      -70      -73       -83   Source: ThomsonReuters, Nomura research
Amortisation                                 0        0        0        0              
                                                                                       (%)                                    1M     3M 12M
EBIT                                     1,010      998    1,018    1,035    1,035
                                                                                          Absolute (MYR)                      5.1 13.7 17.0
Net interest expense                       -18      -17      -28      -28      -26
                                                                                          Absolute (USD)                      3.6 17.2 16.2
Associates & JCEs                            0        0        0        0        0
                                                                                          Relative to index                   3.9    8.2 15.0
Other income                               -33      -25        0        0        0
                                                                                          Market cap (USDmn)              5,270.0
Earnings before tax                        959      956      990    1,007    1,009
                                                                                          Estimated free float (%)          50.0
Income tax                                -228     -237     -247     -252     -252
                                                                                          52-week range (MYR)          56.84/42.7
Net profit after tax                       731      720      742      756      757
                                                                                          3-mth avg daily turnover
Minority interests                           0        0        0        0        0        (USDmn)
                                                                                                                            2.08
Other items                                -16       13        0        0        0        Major shareholders (%)
Preferred dividends                          0        0        0        0        0        British American Tobacco
                                                                                                                            50.0
Normalised NPAT                            716      733      742      756      757        BV
Extraordinary items                         16      -13        0        0        0        Skim ASB                            6.1
Reported NPAT                              731      720      742      756      757        Source: Thomson Reuters, Nomura research

Dividends                                 -685     -788     -705     -718     -719
Transfer to reserves                        46      -68       37       38       38
                                                                                      Notes
Valuation and ratio analysis                                                               Valuations look increasingly
FD normalised P/E (x)                     22.4     21.9     21.6     21.2     21.2
FD normalised P/E at price target (x)     17.8     17.3     17.1     16.8     16.8         stretched to us
Reported P/E (x)                          22.0     22.3     21.6     21.2     21.2
Dividend yield (%)                         4.3      4.9      4.4      4.5      4.5
Price/cashflow (x)                        18.4     19.9     21.2     19.9     19.9
Price/book (x)                            32.7     37.2     34.2     31.7     29.5
EV/EBITDA (x)                             15.3     15.4     15.1     14.8     14.7
EV/EBIT (x)                               16.2     16.4     16.2     15.9     15.8
Gross margin (%)                          37.5     36.2     35.9     36.1     34.9
EBITDA margin (%)                         26.9     25.8     25.7     26.0     26.2
EBIT margin (%)                           25.5     24.2     24.0     24.2     24.3
Net margin (%)                            18.4     17.4     17.5     17.7     17.8
Effective tax rate (%)                    23.8     24.7     25.0     25.0     25.0
Dividend payout (%)                       93.7    109.5     95.0     95.0     95.0
Capex to sales (%)                         1.5      1.4      1.2      1.2      1.2
Capex to depreciation (x)                  1.1      0.9      0.7      0.7      0.6
ROE (%)                                  157.3    156.1    164.9    154.9    144.0
ROA (pretax %)                            81.3     80.7     78.1     77.2     78.0

Growth (%)
Revenue                                     1.1      4.1      2.8      0.7     -0.3
EBITDA                                     -6.8     -0.2      2.3      1.8      0.8
EBIT                                       -5.8     -1.2      2.1      1.6     -0.1
Normalised EPS                             -3.1      2.4      1.3      1.8      0.2
Normalised FDEPS                           -3.1      2.4      1.3      1.8      0.2

Per share
Reported EPS (MYR)                        2.56     2.52      2.60     2.65     2.65
Norm EPS (MYR)                            2.51     2.57      2.60     2.65     2.65
Fully diluted norm EPS (MYR)              2.51     2.57      2.60     2.65     2.65
Book value per share (MYR)                1.72     1.51      1.64     1.77     1.91
DPS (MYR)                                 2.40     2.76      2.47     2.51     2.52
Source: Company data, Nomura estimates
                                                                                       




                                                                                                                                                8
Nomura | British American Tobacco (M)                                                                            April 10, 2012


Cashflow (MYRmn)                                                                     
Year-end 31 Dec                          FY10    FY11    FY12F    FY13F    FY14F    Notes
EBITDA                                   1,067   1,065    1,089    1,109    1,117       Cashflow generation remains strong
Change in working capital                   92      23      -52      -10       -9
Other operating cashflow                  -285    -279     -280     -290     -300
Cashflow from operations                   874     808      756      808      808
Capital expenditure                        -60     -59      -50      -50      -50
Free cashflow                              814     749      706      758      758
Reduction in investments                     0       0        0        0        0
Net acquisitions                             0       0        0        0        0
Reduction in other LT assets                 0       0        0        0        0
Addition in other LT liabilities            -7       9       -7        0       -1
Adjustments                                 63       0      -86       10       22
Cashflow after investing acts              870     757      614      768      780
Cash dividends                            -682    -779     -705     -718     -719
Equity issue                                 0       0        0        0        0
Debt issue                                   0       0        0        0        0
Convertible debt issue                       0       0        0        0        0
Others                                       0     -27        0        0        0
Cashflow from financial acts              -682    -807     -705     -718     -719
Net cashflow                               188     -50      -92       51       61
Beginning cash                             169     357      307      215      266
Ending cash                                357     307      215      266      327
Ending net debt                            293     343      435      384      323
Source: Company data, Nomura estimates



Balance sheet (MYRmn) 
As at 31 Dec                             FY10    FY11    FY12F    FY13F    FY14F    Notes
Cash & equivalents                        357     307      215      266      327        We assume that the company might
Marketable securities
                                                                                        roll forward the entire RM400mn MTN
Accounts receivable                         0       0        0        0        0
Inventories                               194     193      199      200      203
                                                                                        due this year
Other current assets                      180     207      217      228      240
Total current assets                      731     707      632      694      769
LT investments
Fixed assets                              412     429      498      475      442
Goodwill                                  412     412      412      412      412
Other intangible assets                    15      20       20       20       20
Other LT assets
Total assets                             1,569   1,567   1,562    1,601     1,643
Short-term debt                              0     400       0        0         0
Accounts payable                             0       0       0        0         0
Other current liabilities                  383     431     395      396       402
Total current liabilities                  383     831     395      396       402
Long-term debt                             650     250     650      650       650
Convertible debt
Other LT liabilities                        46      54      48       47        47
Total liabilities                        1,079   1,136   1,093    1,094     1,099
Minority interest                            0       0       0        0         0
Preferred stock                              0       0       0        0         0
Common stock                               143     143     143      143       143
Retained earnings                          349     289     326      364       402
Proposed dividends                           0       0       0        0         0
Other equity and reserves                   -1       0       0        0         0
Total shareholders' equity                 490     432     469      507       544
Total equity & liabilities               1,569   1,567   1,562    1,601     1,643

Liquidity (x)
Current ratio                             1.91    0.85     1.60     1.75     1.91
Interest cover                            55.3    59.4     35.9     37.3     40.5

Leverage
Net debt/EBITDA (x)                       0.27    0.32     0.40     0.35     0.29
Net debt/equity (%)                       59.8    79.5     92.7     75.8     59.4

Activity (days)
Days receivable                            0.0     0.0      0.0      0.0      0.0
Days inventory                            30.1    26.8     26.4     26.7     26.5
Days payable                               0.0     0.0      0.0      0.0      0.0
Cash cycle                                30.1    26.8     26.4     26.7     26.5
Source: Company data, Nomura estimates




                                                                                                                              9
Nomura | British American Tobacco (M)                                                                                                                                                                                                                                           April 10, 2012



Valuations look expensive post the
recent rally – maintain Reduce
BAT Malaysia has gained 26% since September 2011, even as the performance of its
peer JT International (Malaysia) suffered in anticipation of an excise duty hike. Although
JT and the KLCI have both gained since then, BAT Malaysia has still outperformed them
by ~30% and ~16%, respectively, over this period.
Even on a regional basis, BAT has outperformed GGRM and ITC by 20% and 12%,
respectively, over the same period.

Fig. 11: BAT has outperformed JT Malaysia, GGRM, ITC and the KLCI since September
2011


     (%)                                                          BAT                     JTI                 KLCI Index
    40

    30

    20

    10

     0
                                                     Nov-11




                                                                                                     Jan-12




                                                                                                                          Feb-12




                                                                                                                                           Mar-12
                               Oct-11




                                                                                                                                                                               Apr-12
         Sep-11




                                                                             Dec-11




   -10

   -20

   -30

Source: Bloomberg



Increasingly expensive at current levels, possibility of excise
hikes real
The stock is currently trading at 22x FY12F earnings, which is higher than +1 standard
deviation above its long-term average of ~17x. Its dividend yield, which has historically
been supportive of its premium valuations, has also dipped below the 5% level (below 1
SD of its mean) – we think current valuations are not sustainable and might correct
sharply if there is any macro slowdown or excise duty hike. In fact, based on our
calculations, current prices are building in no industry volume contraction for the next
three years, a highly unlikely scenario, in our view; we think excise duties will be hiked
sooner or later, and this would lead to a correction in volumes, in our view.

Fig. 12: BAT Malaysia – Forward P/E                                                                                                Fig. 13: BAT Malaysia – dividend yield
Above +1 SD                                                                                                                        Below -1SD
                                                                                                                                        7.0%

   22.0
                                                                                                                                        6.5%
                                                                                                                                                                                                                                                                   +1 SD
   20.0
                                                                             +1 SD                                                      6.0%
                                                                                                                                                                                                                                                              Mean
   18.0
                                                                                                                                        5.5%
                                                                                                Mean
   16.0
                                                                                                                                                                                                       -1 SD
                                                                                                                                        5.0%
                                                                                          -1 SD
   14.0

                                                                                                                                        4.5%
                                                                                                                                                    Jan/05


                                                                                                                                                                      Jan/06


                                                                                                                                                                                           Jan/07


                                                                                                                                                                                                             Jan/08


                                                                                                                                                                                                                               Jan/09


                                                                                                                                                                                                                                                 Jan/10


                                                                                                                                                                                                                                                                   Jan/11


                                                                                                                                                                                                                                                                                     Jan/12
                                                                                                                                                             Jul/05


                                                                                                                                                                                  Jul/06


                                                                                                                                                                                                    Jul/07


                                                                                                                                                                                                                      Jul/08


                                                                                                                                                                                                                                        Jul/09


                                                                                                                                                                                                                                                          Jul/10


                                                                                                                                                                                                                                                                            Jul/11




   12.0
             Jan/03

                      Jan/04

                                   Jan/05

                                            Jan/06

                                                         Jan/07

                                                                    Jan/08

                                                                                 Jan/09

                                                                                            Jan/10

                                                                                                        Jan/11

                                                                                                                 Jan/12




Source: Bloomberg, Nomura research                                                                                                 Source: Bloomberg, Nomura research




                                                                                                                                                                                                                                                                                              10
Nomura | British American Tobacco (M)                                                                                                                                                                            April 10, 2012


Dividends from Petronas – the state oil company’s dividends contribute about 14% of
government revenue, and more importantly are equivalent to almost 70% of the budget
deficit — are likely to fall from 2012 onwards, as Petronas recently announced a 30%
payout ratio policy, which will cut its dividend (from MYR30bn in the past three years to
MYR28bn in 2012) by MYR2bn from next year. This increases the likelihood of the
government raising excise duties to make up for the shortfall, possibly after the elections
are over, in our view.

Fig. 14: Malaysian government revenue split                                                                                               Fig. 15: Petronas dividend history
                                                                                                                                          The company plans to reduce its dividend by MYR2bn
 Malaysian govt revenue split                                 2012              2011                    2010                  2009
 Total Revenue                                               100%              100%                    100%                  100%                                                           FY09   FY10   FY11       FY12E
 Tax Revenue                                                72.6%             70.4%                   69.7%                 68.6%          Petronas dividend payment (RM bn)                 30     30     30          28
  Direct Tax                                                54.6%             52.6%                   50.6%                 49.5%          Dividend payout ratio                            57%    74%    55%        30% *
    Companies                                               25.4%             24.0%                   21.8%                 22.7%
    Petroleum Income                                        14.0%             14.2%                   13.1%                 11.7%          * 30% dividend payout target expected in FY13E
    Individuals                                             11.4%             10.7%                   12.0%                 11.2%
  Indirect Tax                                              17.9%             17.8%                   19.0%                 19.1%         Source: Petronas
    Excise Duty                                              6.4%              6.4%                    7.3%                  7.4%
    Sales Tax                                                4.8%              4.7%                    5.1%                  5.1%
  Non-Tax Revenue                                           27.4%             29.6%                   30.3%                 31.4%

Source: 2011-2012 Economic Report


Fig. 16: BAT gained market share in 2011


                                                  BAT recovered at the exp ense o f Sub VFM

                                                                            BAT                             Oth ers

   65                                                                                                                                                   62.4             62.6          35
                                                                                         61.3        61.8            62.0       61.7       62.0
                                                  60.2      60.5        60.9
          58.9          58.7           59.0                                                                                                                                            30
   60
                                                                                                                                                                                       25
   55                                                                                                                                                                                  20

   50                                                                                                                                                                                  15
            9.0          9.5           8.7        7.7       7.0                                                                                                                        10
                                                                        6.5              6.1           6.0           5.9        5.5
   45                                                                                                                                       5.2         4.8              4.7
                                                                                                                                                                                       5

   40                                                                                                                                                                                  0
                                                                                                                                                         Nov'11
                             Jan'11




                                                                                          Jun'11

                                                                                                           Jul'11
                                                                         May'11
                                         Feb'11

                                                   Mar'11

                                                             Apr'11




                                                                                                                                             Oct'11
            Dec'10




                                                                                                                       Aug'11

                                                                                                                                 Sep'11




                                                                                                                                                                          Dec'11




Source: Company data, Nomura research


Fig. 17: The proportion of illegal cigarettes in Malaysia is still at alarming levels

   (% Illicit)

     40.0                                                                                                                                    37.5            36.3                  36.1
     35.0
     30.0                                                                                                                       25.7
                                                                                                                    23.8
     25.0            21.0             20.0        20.0                                             20.8
     20.0                                                                   17.5
                                                             14.4
     15.0
     10.0
      5.0
      0.0
                      2001


                                       2002


                                                   2003


                                                                 2004


                                                                                  2005


                                                                                                    2006


                                                                                                                     2007


                                                                                                                                 2008


                                                                                                                                                 2009


                                                                                                                                                                  2010


                                                                                                                                                                                    2011




Source: Company data




                                                                                                                                                                                                                              11
Nomura | British American Tobacco (M)                                                                                                                                             April 10, 2012


The Malaysian tobacco market has seen a consistent hike in excise duties every year
since 2003 which, in turn, has resulted in a consistent decline in industry volumes since
2003. Although the absence of an excise-duty hike for cigarettes in the Malaysian 2012
budget is a positive, industry volumes continue to decline (overall volumes were down
3.2% y-y in 2011) and illicit trade still remains high (36.1% in 2011).
The price of cigarettes is negatively correlated (-0.95) to industry volumes.

Fig. 18: Legal industry volumes are highly sensitive to                                                           Fig. 19: Industry volumes have declined on higher excise
prices                                                                                                            duties
Price of premium 20s vs industry volumes

                                       Price of Premium 20's (RM) - LHS                                                                   Excise duty (RM/stick) - LHS
                                       Total Industry Volumes (Bn Sticks) - RHS
                                                                                                                      0.25                Volume (bn sticks) - RHS (Excl. ELPC)           22
    11.0                                                                                             22.0
                                 5 Year Correlation between Price and
                                              TIV = -0.95                                            21.0
    10.0                                                                                                                                                                                  20
                                                                                                     20.0              0.2
     9.0                                                                                             19.0                                                                                 18
     8.0                                                                                             18.0             0.15
                                                                                                     17.0                                                                                 16
     7.0                                                                                             16.0              0.1
     6.0                                                                                             15.0                                                                                 14
                                                                                                     14.0
     5.0                                                                                                              0.05
                                                                                                     13.0                                                                                 12
     4.0                                                                                             12.0
                        2003

                                     2004

                                            2005

                                                         2006

                                                                2007

                                                                        2008

                                                                               2009

                                                                                      2010

                                                                                              2011




                                                                                                                         0                                                                10
                                                                                                                              2003 2004 2005 2006 2007 2008 2009 2010 2011

Source: Nomura research                                                                                           Source: Company data, Nomura research


Fig. 20: Productivity savings – might be limited from here on…

                   60


                   50                                                                                                   2.8

                                                                                             1.6                        8.6
                   40                                                                        6.7            4.5
                                                                  2.7          3.3
      RM million




                                                                               3.9
                                                                                                            8.2
                   30                                            12.9

                                                                                                                                   13.0
                                                   3.4
                   20                                                                                                  39.9
                                                                                             36.5
                                                                               32.6                                                1.5
                                                                                                        28.8                       4.4
                               4.9             16.6              23.0
                   10
                               7.0                                                                                                 11.6
                               3.5                 3.4
                    0
                               2004           2005               2006          2007          2008       2009           2010        2011

                                                   Supply Chain         Indirects     Overheads       Mfg Synergy

Source: Company data, Nomura research




                                                                                                                                                                                               12
Nomura | British American Tobacco (M)                                                                                                                 April 10, 2012


Fig. 21: Historical market share of BAT vs peers
BAT has dominated the Malaysian tobacco market

                                                 BAT     JTI     Phillip Morris

   70%
                                                                                  61.3%       61.7%         62.6%
          59.9%        60.1%        60.4%          59.2%         60.2%
   60%


   50%


   40%


   30%
            20.9%         20.3%       21.0%            20.7%         20.0%          20.0%       20.4%         20.7%
   20%
                                                                                                                14.2%
               11.4%        12.2%          12.4%         11.7%          11.5%         12.2%         12.7%

   10%


    0%
             1Q10         2Q10         3Q10            4Q10          1Q11           2Q11         3Q11         4Q11


Source: Company presentations, Nomura research


Types of cigarettes
The Malaysian cigarette market comprises categories such as premium, value-for-money
(VFM) and sub-value for money, with the premium segment driving the market (71.7%
share in FY2011). BAT has a presence in the premium and VFM segments with its
flagship brand Dunhill, and has a lion’s share of the premium market (72.2% in FY2011).
Pall Mall and Peter Stuyvesant are its brands in the VFM segment.

Fig. 22: Contribution of each segment to the overall market                                 Fig. 23: Market share of BAT in each segment


                                  FY2010    FY2011                                                                         FY2010      FY2011

 80%                                                                                          80%
                                                                                                        72.7% 72.2%
            70.2% 71.7%
 70%                                                                                          70%

 60%                                                                                          60%

 50%                                                                                          50%
                                                                                                                                       42.8%
                                                                                                                               39.0%
 40%                                                                                          40%

 30%                                                                                          30%
                                     22.5% 21.9%
 20%                                                                                          20%

 10%                                                             7.4% 6.4%                    10%
                                                                                                                                                0.0% 0.0%
   0%                                                                                          0%
              Premium                      VFM                     Sub VFM                                  Premium                 VFM          Sub VFM

Source: Company presentation, Nomura research                                               Source: Company presentation, Nomura research


BAT’s positioning and strategy
BAT is the market leader in the Malaysian tobacco market, with a 62.6% market share as
of FY2011. The company continues to focus on the dominant premium segment of the
tobacco market, with its flagship premium brand Dunhill alone holding over 46% of the
entire market. The market share of Dunhill has increased from 42.3% in 4Q10 to 46.5%
in 4Q11. BAT has also managed to increase its share in the VFM segment (from 39% in
FY10 to 42.8% in FY11). The company launched the Peter Stuyvesant brand in the VFM
segment in 2H10 which now has 3.3% share of the overall market.




                                                                                                                                                                   13
Nomura | British American Tobacco (M)                                                                                                                       April 10, 2012


Fig. 24: Market share of BAT’s segments

BAT Brands                                 1Q09       2Q09           3Q09       4Q09           1Q10          2Q10      3Q10       4Q10    1Q11    2Q11    3Q11       4Q11
Dunhill                                   44.2%      43.2%           42.6%      44.5%         43.5%          43.4%     42.9%      42.3%   43.8%   44.8%   45.4%     46.5%
Pall Mall                                  7.3%       8.0%           7.9%       7.9%           8.0%          7.9%      7.2%       6.6%    6.2%    6.4%    6.2%       6.0%
Kent                                       2.7%       2.7%           2.9%       2.8%           2.8%          3.1%      2.6%       2.3%    2.3%    2.2%    2.2%       2.3%
Lucky Strike                               0.4%       0.4%           0.4%       0.4%           0.4%          0.5%      0.5%       0.4%    0.4%    0.4%    0.4%       0.4%
Peter Stuyvesant                           0.0%       0.0%           0.0%       0.0%           0.0%          0.0%      0.0%       1.4%    3.3%    3.2%    3.3%       3.3%
Others                                     5.3%       4.9%           5.3%       5.0%           5.2%          5.2%      7.2%       6.2%    4.2%    4.3%    4.2%       4.1%
BAT Total Market Share                    59.9%      59.2%           59.1%      60.6%         59.9%          60.1%     60.4%      59.2%   60.2%   61.3%   61.7%     62.6%

Source: Company presentation, Nomura research


Fig. 25: BAT Malaysia dividend payout - Less likelihood of any special dividend now


                                          Special Dividend last paid in 2006, 2011
          (RM)
                                 Net Interim DPS           Net Special DPS              Net Final DPS

    3.50

    3.00
                                             1.32




                                                                                                                       0.3 0.66
    2.50

                                                                                            0.76
                                                                                 0.74




                                                                                                                0.63
                                                                                                      0.62
                                                              1.12
                          1.04




                                                                         1.24




    2.00
                                                    1.33
                                   1.20


                                             0.70




    1.50
                   0.91




                                                                         0.22
                          0.50




                                                              0.56




                                                                                            1.89
                                                                                 1.83




                                                                                                                       1.80
    1.00
                                                                                                                1.77
                                                                                                      1.74
                                                    1.15
                                             1.08




                                                                         1.08
                                   0.96
                          0.91




                                                              0.83
                   0.79




    0.50

    0.00
                   2000


                          2001


                                   2002


                                             2003


                                                    2004


                                                              2005


                                                                         2006


                                                                                 2007


                                                                                            2008


                                                                                                      2009


                                                                                                                2010


                                                                                                                       2011



Source: Company data, Nomura research


Valuation methodology. Our TP of MYR44.50 is DCF-derived based on the company’s
discounted free cashflow. We currently assume a risk-free rate of 4% with an equity-risk
premium of 6%, a beta of 0.7 and a terminal growth rate of 0.5%. This implies a P/E of
17.1x for FY12F at our TP of MYR44.50, in line with its historical average P/E of ~17x.
Risks that may impede the achievement of the target price. Upside risks to our TP
and earnings forecast include a halt in industry volume contractions, lower-than-
expected downtrading and illicit trade, a possibility of BAT further recovering market
share in the value-for-money segment of the market and no excise-duty hike in 2012F.




                                                                                                                                                                         14
Gudang Garam                                    GGRM.JK GGRM IJ

CONSUMER RELATED
                                                                                                                  EQUITY RESEARCH




                                                                                                        April 10, 2012
The preferred cigarette player in the region                                                            Rating
                                                                                                                                      Buy
A cigarette name with                                                                                   Remains

                                                                                                        Target price             IDR 75,000
undemanding valuation and                                                                               Remains

                                                                                                        Closing price            IDR 59,450
attractive growth potential                                                                             April 3, 2012

                                                                                                        Potential upside             +26.2%

Action: Reiterate Buy                                                                                   Anchor themes
We prefer tobacco player Gudang Garam in the ASEAN landscape. We
                                                                                                        Indonesia's consumer sector is
like GG on what we believe is a still-growing cigarette market, robust
                                                                                                        still at the take-off stage of
economy and relatively favourable regulatory environment. Maintain Buy.                                 strong growth, in our view. We
Catalysts: Demographic size and rising incomes                                                          expect discretionary to
We estimate additional demand for 106bn cigarette sticks over 2010-15F,                                 outperform consumer staples
based on the current smoking ratio of 35% and demographics showing                                      with the change in consumption
that 27% of the 237mn under age 15 smoke (2010 census). Rising                                          patterns. The entry of
incomes offer support to leading brands as consumers trade up or move                                   newcomers should see
to per-pack purchases, from per-stick purchases previously.                                             competition intensify, but we
                                                                                                        expect a time lag before it
Valuation: Our TP of IDR75,000 implies 20x FY13F P/E or a 15%                                           affects company margins.
discount to JCI Consumer leading P/E of 24x
                                                                                                        Nomura vs consensus
Regulatory environment remains favourable
                                                                                                        We are in line with consensus
We expect the regulatory environment to remain favourable for GG, given
                                                                                                        on FY13F earnings. We expect
that: 1) A&P limitations heighten barriers to entry, thus benefiting                                    a higher payout of 70% for
established brands, 2) government efforts to simplify the excise tax policy                             FY13F vs. consensus of 35%.
benefit higher tax payers, and 3) the relatively higher contribution of excise
tax to total tax revenue (7.7% in 2010) and lower fiscal deficit (-1.2% GDP                             Research analysts
in 2011) should ease the regulatory risk on the excise tax policy.
                                                                                                        Indonesia Consumer Related
Limited inflation impact
                                                                                                        Janni Asman - PTNI
We expect GG to be quite resilient amid concern over rising inflation.                                  Janni.Asman@nomura.com
When inflation hit 11% in 2008, GG volume still grew by ~3%. On our                                     +62 21 2991 3345

analysis, inflation at the higher single-digit level would have limited impact.                         Wilianto Ie - PTNI
                                                                                                        wilianto.ie@nomura.com
                                                                                                        +62 21 2991 3341



31 Dec                               FY11               FY12F               FY13F              FY14F
Currency (IDR)                      Actual        Old     New       Old         New    Old       New

Revenue (bn)                      41,884       49,092   47,884   55,075    54,530             61,305
Reported net profit (bn)            4,895       6,136    5,827    7,124     7,032              7,767
Normalised net profit (bn)          4,895       6,136    5,827    7,124     7,032              7,767
Normalised EPS                  2,544.03 3,189.28 3,028.48 3,702.31 3,654.48                 4,036.67
Norm. EPS growth (%)                 18.1        21.9     19.0     16.1         20.7             10.5
Norm. P/E (x)                        21.5        N/A      18.0      N/A         14.9   N/A       13.5
EV/EBITDA (x)                        14.3        11.4     12.1      9.9         10.2              9.3
Price/book (x)                           4.3     N/A       3.9      N/A          3.5   N/A        3.3
Dividend yield (%)                       2.3     N/A       3.3      N/A          4.7   N/A        5.9
ROE (%)                              21.5        23.9     22.6     24.9         24.5             24.9   See Appendix A-1 for analyst
Net debt/equity (%)                  20.8 net cash        13.8 net cash          9.1              7.5   certification, important
Source: Company data, Nomura estimates
                                                                                                        disclosures and the status of
                                                                                                        non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | Gudang Garam                                                                                                                         April 10, 2012



Key data on Gudang Garam
Income statement (IDRbn)                                                                             Relative performance chart (one year)
Year-end 31 Dec                              FY10        FY11       FY12F       FY13F       FY14F
Revenue                                     37,692      41,884      47,884      54,530      61,305
Cost of goods sold                         -28,826     -31,755     -35,856     -40,460     -45,476
Gross profit                                 8,866      10,129      12,029      14,070      15,828
SG&A                                        -3,008      -3,291      -3,939      -4,406      -5,180
Employee share expense                           0           0           0           0           0
Operating profit                             5,858       6,839       8,090       9,664      10,648

EBITDA                                       6,659       7,716       8,990     10,574      11,563
Depreciation                                  -802        -878        -900       -910        -915    Source: ThomsonReuters, Nomura research
Amortisation                                     0           0           0          0           0     
                                                                                                      (%)                                    1M     3M 12M
EBIT                                         5,858       6,839       8,090      9,664      10,648
                                                                                                         Absolute (IDR)                     -3.5 13.6     4.5
Net interest expense                          -206        -253        -223       -178        -167
                                                                                                         Absolute (USD)                     -7.3    9.1   4.7
Associates & JCEs                                0           0           0          0           0
                                                                                                         Relative to index                   8.1 26.1 13.9
Other income                                   -20          30           0          0           0
                                                                                                         Market cap (USDmn)             11,797.3
Earnings before tax                          5,631       6,616       7,867      9,487      10,481
                                                                                                         Estimated free float (%)          27.0
Income tax                                  -1,417      -1,657      -1,967     -2,372      -2,620
                                                                                                         52-week range (IDR)        61500/33300
Net profit after tax                         4,215       4,959       5,900      7,115       7,861
                                                                                                         3-mth avg daily turnover
Minority interests                             -69         -64         -73        -83         -94        (USDmn)
                                                                                                                                           7.69
Other items                                      0           0           0          0           0        Major shareholders (%)
Preferred dividends                              0           0           0          0           0        Founding family                   73.0
Normalised NPAT                              4,146       4,895       5,827      7,032       7,767        Source: Thomson Reuters, Nomura research
Extraordinary items                              0           0           0          0           0
Reported NPAT                                4,146       4,895       5,827      7,032       7,767
Dividends                                   -1,693      -2,447      -3,496     -4,922      -6,214
                                                                                                     Notes
Transfer to reserves                         2,453       2,447       2,331      2,109       1,553
                                                                                                          We expect earnings growth to
Valuation and ratio analysis                                                                              continue in 2012F and 2013F
FD normalised P/E (x)                         25.3        21.5        18.0        14.9        13.5
FD normalised P/E at price target (x)         30.2        25.5        21.5        17.8        16.1
Reported P/E (x)                              25.3        21.5        18.0        14.9        13.5
Dividend yield (%)                             1.6         2.3         3.3         4.7         5.9
Price/cashflow (x)                            39.5         na         20.7        17.5        15.6
Price/book (x)                                 5.0         4.3         3.9         3.5         3.3
EV/EBITDA (x)                                 16.0        14.3        12.1        10.2         9.3
EV/EBIT (x)                                   18.2        16.1        13.5        11.2        10.1
Gross margin (%)                              23.5        24.2        25.1        25.8        25.8
EBITDA margin (%)                             17.7        18.4        18.8        19.4        18.9
EBIT margin (%)                               15.5        16.3        16.9        17.7        17.4
Net margin (%)                                11.0        11.7        12.2        12.9        12.7
Effective tax rate (%)                        25.2        25.0        25.0        25.0        25.0
Dividend payout (%)                           40.8        50.0        60.0        70.0        80.0
Capex to sales (%)                             3.2         4.0         2.1         1.9         1.7
Capex to depreciation (x)                      1.5         1.9         1.1         1.1         1.2
ROE (%)                                       21.0        21.5        22.6        24.5        24.9
ROA (pretax %)                                21.1        20.3        20.7        23.2        23.8

Growth (%)
Revenue                                       14.3        11.1        14.3        13.9        12.4
EBITDA                                        12.1        15.9        16.5        17.6         9.4
EBIT                                          12.5        16.7        18.3        19.5        10.2
Normalised EPS                                20.0        18.1        19.0        20.7        10.5
Normalised FDEPS                              20.0        18.1        19.0        20.7        10.5

Per share
Reported EPS (IDR)                        2,154.93    2,544.03    3,028.48    3,654.48    4,036.67
Norm EPS (IDR)                            2,154.93    2,544.03    3,028.48    3,654.48    4,036.67
Fully diluted norm EPS (IDR)              2,154.93    2,544.03    3,028.48    3,654.48    4,036.67
Book value per share (IDR)               11,016.73   12,680.30   14,164.23   15,631.10   16,774.03
DPS (IDR)                                   880.00    1,272.02    1,817.09    2,558.13    3,229.34    




Source: Company data, Nomura estimates




                                                                                                                                                                16
Nomura | Gudang Garam                                                                                                April 10, 2012


Cashflow (IDRbn)                                                                       
Year-end 31 Dec                           FY10     FY11    FY12F    FY13F    FY14F    Notes
EBITDA                                    6,659    7,716    8,990   10,574   11,563       Higher working capital in 2011 was
Change in working capital                -2,278   -6,056   -1,583   -1,857   -1,896       due to greater-than-expected
Other operating cashflow                 -1,720   -1,988   -2,333   -2,708   -2,950
                                                                                          purchase of raw material inventories
Cashflow from operations                  2,662     -327    5,074    6,008    6,717
Capital expenditure                      -1,193   -1,665   -1,000   -1,030   -1,061
Free cashflow                             1,468   -1,992    4,074    4,978    5,656
Reduction in investments                               9        0        0        0
Net acquisitions                              0        0        0        0        0
Reduction in other LT assets                200     -100      -74      -82      -84
Addition in other LT liabilities             52       64      144      159      162
Adjustments                                   3       14        0        0        0
Cashflow after investing acts             1,724   -2,005    4,143    5,055    5,735
Cash dividends                           -1,251   -1,693   -2,972   -4,209   -5,568
Equity issue                                  0       -1        0        0        0
Debt issue                                 -499    3,480   -1,664     -500        0
Convertible debt issue                        0        0        0        0        0
Others                                       52       64      144      159      162
Cashflow from financial acts             -1,697    1,850   -4,492   -4,550   -5,406
Net cashflow                                 26     -154     -349      505      329
Beginning cash                            1,223    1,249    1,095      746    1,252
Ending cash                               1,249    1,095      746    1,252    1,581
Ending net debt                           1,434    5,069    3,754    2,748    2,419
Source: Company data, Nomura estimates



Balance sheet (IDRbn) 
As at 31 Dec                              FY10     FY11    FY12F    FY13F    FY14F    Notes
Cash & equivalents                        1,249    1,095      746    1,252    1,581       Short-term debt is for working capital
Marketable securities                         0        0        0        0        0       purpose
Accounts receivable                         904      924    1,312    1,494    1,680
Inventories                              20,174   28,020   29,471   32,147   34,886
Other current assets                        581      343      393      447      503
Total current assets                     22,908   30,382   31,921   35,339   38,649
LT investments                                9        0        0        0        0
Fixed assets                              7,407    8,190    8,290    8,410    8,556
Goodwill                                      0        0        0        0        0
Other intangible assets                       0        0        0        0        0
Other LT assets                             417      517      591      673      757
Total assets                             30,742   39,089   40,802   44,422   47,962
Short-term debt                           2,684    6,164    4,500    4,000    4,000
Accounts payable                            375    1,516      982    1,109    1,246
Other current liabilities                 5,423    5,855    6,693    7,622    8,569
Total current liabilities                 8,482   13,534   12,176   12,731   13,815
Long-term debt                                0        0        0        0        0
Convertible debt                              0        0        0        0        0
Other LT liabilities                        939    1,003    1,147    1,306    1,469
Total liabilities                         9,421   14,538   13,323   14,037   15,284
Minority interest                           123      153      226      310      403
Preferred stock                               0        0        0        0        0
Common stock                              1,016    1,016    1,016    1,016    1,016
Retained earnings                        20,181   23,382   26,237   29,060   31,259
Proposed dividends                            0        0        0        0        0
Other equity and reserves                     0        0        0        0        0
Total shareholders' equity               21,197   24,398   27,253   30,076   32,275
Total equity & liabilities               30,742   39,089   40,802   44,422   47,962

Liquidity (x)
Current ratio                              2.70     2.24     2.62     2.78     2.80
Interest cover                             28.4     27.0     36.3     54.4     63.7

Leverage
Net debt/EBITDA (x)                        0.22     0.66     0.42     0.26     0.21
Net debt/equity (%)                         6.8     20.8     13.8      9.1      7.5

Activity (days)
Days receivable                             9.3      8.0      8.5      9.4      9.4
Days inventory                            234.4    277.0    293.4    277.9    269.0
Days payable                                4.4     10.9     12.8      9.4      9.4
Cash cycle                                239.3    274.1    289.2    277.9    269.0
Source: Company data, Nomura estimates




                                                                                                                                   17
Nomura | Gudang Garam                                                                                                                                                      April 10, 2012



Indonesia: Gudang Garam (GGRM IJ)
Gudang Garam is one of the cigarette companies that we believe offers investors growth
on top of dividends and resilience. The recent excise tax policy also looks favourable for
the company.


Tobacco industry still growing
In Indonesia, smoking is rampant, with a 35% smoking ratio (66% male and 4% female).
The tobacco industry is still growing, we believe, with smokers consuming more as
income levels rise. Smoking ratios are relatively balanced across generations, with
penetration in the youngest tier (15-24 years old) reaching 27%, despite comprising the
under 18 age group (i.e., younger than the legal smoking age). The low base of female
smokers also provides potential for further growth, in our view.
Statistics also show that, to a certain extent, the average Indonesian spends more on
tobacco as income grows. Tobacco ranks just behind cereal/rice, staples for
Indonesians, on average household food spending. It accounted for about 5% of total
spending (vs around 9% for cereal/rice), as per 2010 Statistics Indonesia data.

Fig. 26: Indonesia: Smoking ratio by generation                           Fig. 27: Tobacco vs. rice expenditure (2009)
The 15-24 year old age group includes those below the legal smoking age   The horizontal line represents various income groups
(18 years old)
 (Age group)                                                               (IDR '000)                       Cereals                  Tobacco
                                                                           60
   75+
                                                                           50
 65-74
                                                                           40
 55-64
                                                                           30
 45-54                                                                     20

 35-44                                                                     10

 25-34                                                                       0
                                                                                             100 - 150


                                                                                                             150 - 200


                                                                                                                         200 - 300


                                                                                                                                      300 - 500


                                                                                                                                                  500 - 750


                                                                                                                                                              750 - 1000
                                                                                    <= 100




                                                                                                                                                                                 >= 1000
 15-24

         0%          10%          20%         30%    40%        50%                                      Expenditure/Mth (IDR '000)
Note: Based on 2010 data                                                  Source: Indonesia Statistics, Nomura research
Source: Ministry of Health, Nomura research



Types of cigarettes: Dominated by clove cigarettes
Cigarettes in Indonesia are divided into clove and non-clove (or white) cigarettes. Most
Indonesians prefer clove cigarettes, which account for about 90% of market volume. This
distinctive preference creates a natural entry barrier for the Indonesia cigarette market to
foreign players lacking know-how in the clove segment.
There are two main types of cloves cigarettes – machine-rolled (SKM) and hand-rolled
(SKT). The SKM type has increasingly gained traction since first being introduced in
1979. However, we note that the SKT type tends to show stronger growth than the SKM
type in weak economic times. The “mild” or low-tar, low-nicotine sub-segment of SKM-
type cigarettes has also shown growth.
GG is the largest producer of SKM cigarettes in Indonesia. It has two major brands in the
segment: GG International and GG Surya. SKM cigarettes accounted for 83% of its total
sales volume for 2010. Its main “mild” brand, Promild, has increasingly gained traction,
and accounted for about 5% of total sales volume for 2011. SKT cigarettes accounted for
the remaining 17% or so of GG’s sales volume for 2010. Its major SKT brand is GG
Merah. The company has almost no exposure to white cigarettes.




                                                                                                                                                                                           18
Nomura | Gudang Garam                                                                                                                                                  April 10, 2012


Competitors, such as PM Sampoerna and BAT Bentoel, have stronger footholds in the
growing “mild” segment. Both also have substantial exposure to white cigarettes (15%
for Sampoerna and 19% for Bentoel as per 2010). In the SKT segment, PM Sampoerna
and Djarum are the strong players, with brands such as Sampoerna 234, Sampoerna
Hijau and Djarum Coklat. As for SKM, Djarum is a competitor to GG with its strong SKM
brand, Djarum Super.

Fig. 28: GG: Machine-roll (SKM) vs. hand-roll (SKT) sales volume comparison

    (bn sticks)                                                       SKM        SPM          SKT
      300

         250

         200

         150

         100

         50

          0
                78                83                     88             93              98       03               08
Source: Indonesia Cigarette Manufacturer Association, company data, Nomura research



Gudang Garam positioning and strategy
Gudang Garam, together with Sampoerna, Djarum and Bentoel, accounted for about
75% of Indonesia’s cigarette industry in 2010 by volume. Based on company data from
2010 annual reports, GG ranked second (behind Sampoerna) with a 22% volume market
share.
In terms of pricing, GG’s SKM products are priced in line with Sampoerna’s and Djarum’s
products and slightly higher than Bentoel’s. For SKT products, GG’s prices are lower
than Sampoerna’s 234 but in line with Hijau and Djarum’s Coklat.
Since 2008/2009, GG has moved from a pricing strategy (i.e., holding off on price
increases) to a distribution strategy, by bringing in the distribution system under the
company management. We note that the new strategy provides better market
intelligence for the company while helping maintain profitability. The company expects
this to help in countering the market share losses it has seen over the past decade.

Fig. 29: GG SKM ASP vs. tax trend                                                            Fig. 30: GG SKT ASP vs. tax trend
SKM tax increase is based on highest hike applicable for Gudang Garam                        SKT tax increase is based on highest hike applicable for Gudang Garam

    70                                                                                           45      SKT ASP increase   SKT Tax increase
               SKM ASP increase   SKM Tax increase

                                                                                                 40
    60
                                                                                                 35

    50
                                                                                                 30

    40                                                                                           25


                                                                                                 20
    30

                                                                                                 15
    20
                                                                                                 10

    10                                                                                            5


     0                                                                                            0
           2007A         2008A      2009A            2010A    2011F     2012F   2013F                  2007A       2008A      2009A            2010A   2011F   2012F   2013F



Source: Ministry of Finance, Company data, Nomura estimates                                  Source: Ministry of Finance, Company data, Nomura estimates




                                                                                                                                                                                    19
Nomura | Gudang Garam                                                                           April 10, 2012




Excise tax policy remains favourable
Indonesia’s excise tax for cigarettes is based on a certain nominal amount for each price
and the company’s production size category. The 2012 excise tax was increased by
around 16% on average across all categories. As well, the excise tax structure was
simplified to 15 tiers, from 19 tiers.
The excise tax hike ranges from 8-49%, with a higher increase applied to cheaper
brands in both the machine-rolled (SKM) and hand-rolled (SKT) segments, with the
excise tax increase ranging from 10-38% (differs on every pricing tiers). Leading white
cigarette brands also saw higher increases in excise tax for 2012, ranging from 12-49%.
The excise tax hikes for GG were at the low end of the range – 9% for machine-rolled
(SKM) and 8% for hand-rolled (SKT) cigarettes (based on major brands, which
comprised nearly 95% of total sales volume).
We believe that GG can pass on the excise tax increase in 2012F. On the other hand,
the jump in the excise tax for white cigarette is likely to affect those players with greater
exposure to this segment, such as PM Sampoerna and BAT Bentoel.
We expect comparatively lower regulatory risk on excise tax policy for Indonesia,
considering the following:
• The higher tax hike for cheaper brands combined with a simplified excise tax structure
  should benefit leading players that already pay higher tax rates, such as GG, in our
  view.
• We see a relatively higher excise tax contribution to tax revenue (7.7% in 2011) and
  lower budget deficit (-1.2% GDP in 2011). For comparison, we note the excise tax
  contribution to tax revenue was 5.7% for 2011 for the Philippines, 2.8% for 2011 for
  Thailand (tobacco excise tax only), and 10.7% for 2010 for Malaysia. The cigarette
  contribution to India’s total tax collection was 1.5% for 2009-10. The fiscal balance in
  2011 was -2% GDP for the Philippines, -1.5% GDP for Thailand, -5.3% GDP for
  Malaysia, and -5.9% GDP for India.


Valuation and dividend projections
Our target price of IDR75,000 implies FY13F P/E of 20x. It is at a 23% discount to our
DDM valuation (methodology unchanged) with a discount rate of 12.5% and a long-term
growth rate of 9%. The dividends are discounted back to 2013F. We expect a dividend
yield of 5% for 2013F.
Risks
Key downside risks to our view include crop failure causing a rise in raw material prices,
government intervention with negative effects, and global economic setback, which might
cause credit tightening and affect the company’s profitability.




                                                                                                             20
ITC         ITC.NS ITC IN

GENERAL CONSUMER
                                                                                                                   EQUITY RESEARCH




                                                                                                         April 10, 2012
India - an attractive tobacco market                                                                     Rating
                                                                                                                                         Buy
ITC is one of the most attractive                                                                        Remains

                                                                                                         Target price                INR 246
tobacco companies even in a                                                                              Under review

                                                                                                         Closing price               INR 227
regional context; reiterate BUY                                                                          April 3, 2012

                                                                                                         Potential upside                +8.4%


Action: Reiterate long-term attractiveness even in a regional context                                    Anchor themes
We have looked at the cigarette business across the ASEAN region and                                     Cigarettes account for 15% of
compared major players in each of the countries on a variety of                                          overall tobacco consumption in
parameters. We believe, considering a variety of these factors, India is                                 India. Longer term, as incomes
one of the most attractive tobacco markets in the world, and ITC, being                                  move up, we see this number
the market leader, stands to benefit the most from the long-term                                         rising, which should support
attractiveness of the market.                                                                            mid- to high-single-digit volume
                                                                                                         growth in the core cigarettes
Catalysts: Continued steady volume growth and gradual shift away                                         business for ITC.
from smokeless and bidis to cigarettes
From a macro perspective, cigarettes still only account for ~15% of overall                              Nomura vs consensus
tobacco consumption in India. Add to that the per capita consumption of                                  We are largely in line with
tobacco is lower in India vs. even other emerging markets such as                                        consensus on our earnings for
Bangladesh and Pakistan in the region. This leaves significant room for                                  FY12F and FY13F.
cigarettes to gain share over the long term and ITC should be the biggest
beneficiary, being the single largest cigarette major in the country.                                    Research analysts


Valuation: ITC trades at 22.7x FY13F with a 4% dividend yield                                            India Consumer Related
Post its recent run, ITC trades at 22.7x FY13F EPS, which is towards the                                 Manish Jain - NFASL
higher end of the long-term average. However, this in our view also                                      manish.jain@nomura.com
                                                                                                         +91 22 4037 4186
reflects the attractiveness of the business in India and going forward we
                                                                                                         Anup Sudhendranath - NSFSPL
expect these multiples to sustain. Adding to the core cigarette business,                                anup.sudhendranath@nomura.com
ITC also has over the last decade or so developed a robust consumer                                      +91 22 4037 5406
goods business, which we believe will mean it will start to trade at
consumer goods multiples over the long term. We reiterate our BUY rating
on the stock and believe ITC offers global investors the most attractive
way to invest in tobacco business in the ASEAN region.

31 Mar                               FY11               FY12F               FY13F               FY14F
Currency (INR)                      Actual        Old     New       Old         New       Old     New

Revenue (mn)                     225,337 261,023 261,023 302,459 302,459 344,049 344,049
Reported net profit (mn)          50,179       59,281   59,281   71,339    71,339      81,075   81,075
Normalised net profit (mn)        48,474       59,281   59,281   71,339    71,339      81,075   81,075
Normalised EPS                       6.26        7.66     7.66     9.22         9.22    10.48    10.48
Norm. EPS growth (%)                 19.7        22.3     22.3     20.3         20.3     13.6     13.6
Norm. P/E (x)                        33.4        N/A      27.3      N/A         22.7     N/A      20.0
EV/EBITDA (x)                        20.7        17.5     17.5     14.4         14.4     12.6     12.6
Price/book (x)                           9.4     N/A       8.5      N/A          8.2     N/A       8.0
Dividend yield (%)                       2.5     N/A       2.5      N/A          4.1     N/A       4.6
ROE (%)                              30.9        32.6     32.6     36.9         36.9     40.6     40.6   See Appendix A-1 for analyst
Net debt/equity (%)              net cash net cash net cash net cash net cash net cash net cash          certification, important
Source: Company data, Nomura estimates
                                                                                                         disclosures and the status of
                                                                                                         non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | ITC                                                                                                                          April 10, 2012



Key data on ITC
Income statement (INRmn)                                                                     Relative performance chart (one year)
Year-end 31 Mar                            FY10      FY11     FY12F      FY13F      FY14F
Revenue                                  193,060   225,337   261,023    302,459    344,049
Cost of goods sold                       -73,525   -86,300   -99,646   -112,786   -127,034
Gross profit                             119,535   139,037   161,378    189,673    217,015
SG&A                                     -46,303   -52,006   -58,110    -64,923    -73,753
Employee share expense                   -14,640   -17,240   -20,081    -23,356    -26,643
Operating profit                          58,592    69,792    83,186    101,393    116,619

EBITDA                                    65,031    76,783    90,955   109,940    125,683
Depreciation                              -6,439    -6,991    -7,769    -8,546     -9,064    Source: ThomsonReuters, Nomura research
Amortisation                                   0         0         0         0          0     
                                                                                              (%)                                    1M     3M 12M
EBIT                                      58,592    69,792    83,186   101,393    116,619
                                                                                                 Absolute (INR)                      5.9    1.0 19.2
Net interest expense                        -735      -608      -118      -118       -118
                                                                                                 Absolute (USD)                    11.3     -1.2   7.8
Associates & JCEs                              0         0         0         0          0
                                                                                                 Relative to index                  -2.6    3.9 33.1
Other income                               2,890     3,460     5,019     5,419      4,719
                                                                                                 Market cap (USDmn)             32,110.1
Earnings before tax                       60,746    72,644    88,087   106,694    121,219
                                                                                                 Estimated free float (%)          67.0
Income tax                               -20,349   -23,655   -28,188   -34,675    -39,396
                                                                                                 52-week range (INR)        216.2/147.72
Net profit after tax                      40,397    48,989    59,899    72,018     81,823
                                                                                                 3-mth avg daily turnover
Minority interests                          -426      -515      -618      -680       -748        (USDmn)
                                                                                                                                  27.59
Other items                                    0         0         0         0          0        Major shareholders (%)
Preferred dividends                            0         0         0         0          0        LIC of India                      12.7
Normalised NPAT                           39,971    48,474    59,281    71,339     81,075        UTI                               11.6
Extraordinary items                        1,711     1,705         0         0          0        Source: Thomson Reuters, Nomura research
Reported NPAT                             41,682    50,179    59,281    71,339     81,075
Dividends                                -44,523   -40,024   -41,230   -65,631    -74,589
Transfer to reserves                      -2,841    10,154    18,051     5,707      6,486
                                                                                             Notes

Valuation and ratio analysis                                                                      Click here to enter text.
FD normalised P/E (x)                       40.0      33.4      27.3       22.7       20.0
FD normalised P/E at price target (x)       46.8      39.1      32.0       26.6       23.4
Reported P/E (x)                            38.3      32.3      27.3       22.7       20.0
Dividend yield (%)                           2.8       2.5       2.5        4.1        4.6
Price/cashflow (x)                          19.9      24.5      29.2       20.1       17.9
Price/book (x)                              10.5       9.4       8.5        8.2        8.0
EV/EBITDA (x)                               24.6      20.7      17.5       14.4       12.6
EV/EBIT (x)                                 27.3      22.8      19.1       15.7       13.6
Gross margin (%)                            61.9      61.7      61.8       62.7       63.1
EBITDA margin (%)                           33.7      34.1      34.8       36.3       36.5
EBIT margin (%)                             30.3      31.0      31.9       33.5       33.9
Net margin (%)                              21.6      22.3      22.7       23.6       23.6
Effective tax rate (%)                      33.5      32.6      32.0       32.5       32.5
Dividend payout (%)                        106.8      79.8      69.6       92.0       92.0
Capex to sales (%)                           6.3       6.0       4.3        3.3        2.9
Capex to depreciation (x)                    1.9       1.9       1.5        1.2        1.1
ROE (%)                                     27.7      30.9      32.6       36.9       40.6
ROA (pretax %)                              28.4      30.1      32.9       36.7       39.6

Growth (%)
Revenue                                     15.7      16.7      15.8       15.9       13.8
EBITDA                                      21.3      18.1      18.5       20.9       14.3
EBIT                                        22.6      19.1      19.2       21.9       15.0
Normalised EPS                              18.4      19.7      22.3       20.3       13.6
Normalised FDEPS                            18.4      19.7      22.3       20.3       13.6

Per share
Reported EPS (INR)                          5.46      6.48      7.66      9.22      10.48
Norm EPS (INR)                              5.23      6.26      7.66      9.22      10.48
Fully diluted norm EPS (INR)                5.23      6.26      7.66      9.22      10.48
Book value per share (INR)                 19.96     22.31     24.64     25.38      26.21
DPS (INR)                                   5.83      5.17      5.33      8.48       9.64
Source: Company data, Nomura estimates                                                        




                                                                                                                                                         22
Nomura | ITC                                                                                                                    April 10, 2012


Cashflow (INRmn)                                                                                 
Year-end 31 Mar                            FY10       FY11      FY12F      FY13F      FY14F     Notes
EBITDA                                    65,031     76,783     90,955    109,940    125,683        Click here to enter text.
Change in working capital                 29,261     -3,898     -2,670        851        136
Other operating cashflow                 -13,814     -6,748    -32,836    -30,054    -35,544
Cashflow from operations                  80,478     66,138     55,449     80,736     90,276
Capital expenditure                      -12,228    -13,453    -11,321    -10,000    -10,000
Free cashflow                             68,250     52,684     44,129     70,736     80,276
Reduction in investments                 -24,934      1,326    -10,000     -4,000          0
Net acquisitions
Reduction in other LT assets               2,195     -3,444      8,680          0          0
Addition in other LT liabilities               0          0          0          0          0
Adjustments
Cashflow after investing acts             45,511     50,567     42,808     66,736     80,276
Cash dividends                           -44,523    -40,024    -41,230    -65,631    -74,589
Equity issue                                  87        102          0          0          0
Debt issue                                  -759        138        251          0          0
Convertible debt issue                         0          0          0          0          0
Others                                         0          0          0          0          0
Cashflow from financial acts             -45,195    -39,784    -40,979    -65,631    -74,589
Net cashflow                                 316     10,783      1,829      1,105      5,687
Beginning cash                            13,170     13,486     24,269     26,098     27,202
Ending cash                               13,486     24,268     26,098     27,202     32,889
Ending net debt                          -12,378    -23,023    -24,852    -25,956    -31,643
Source: Company data, Nomura estimates



Balance sheet (INRmn) 
As at 31 Mar                               FY10       FY11      FY12F      FY13F      FY14F     Notes
Cash & equivalents                        13,486     24,269     26,098     27,202     32,889        Click here to enter text.
Marketable securities                     44,239     40,629     50,629     54,629     54,629
Accounts receivable                       22,580     24,361     30,036     33,975     38,647
Inventories                               50,920     57,331     64,362     74,579     84,834
Other current assets                       3,038      3,665      4,291      4,972      5,656
Total current assets                     134,264    150,255    175,415    195,357    216,654
LT investments                             5,766      8,049      8,049      8,049      8,049
Fixed assets                              87,740     91,438    103,670    105,124    106,059
Goodwill                                       0          0          0          0          0
Other intangible assets                        0          0          0          0          0
Other LT assets                           10,236     13,680      5,000      5,000      5,000
Total assets                             238,006    263,422    292,134    313,530    335,762
Short-term debt                            1,098        995        995        995        995
Accounts payable                          37,380     46,683     50,774     58,834     66,925
Other current liabilities                 45,868     41,485     48,055     55,683     63,340
Total current liabilities                 84,346     89,162     99,824    115,512    131,259
Long-term debt                                10        251        251        251        251
Convertible debt                               0          0          0          0          0
Other LT liabilities                           0          0          0          0          0
Total liabilities                         84,355     89,413    100,075    115,763    131,510
Minority interest                          1,264      1,408      1,408      1,408      1,408
Preferred stock                                0          0          0          0          0
Common stock                               3,818      7,738      7,738      7,738      7,738
Retained earnings                        140,625    156,750    174,801    180,508    186,994
Proposed dividends
Other equity and reserves                  7,944      8,112      8,112      8,112      8,112
Total shareholders' equity               152,387    172,600    190,651    196,358    202,844
Total equity & liabilities               238,006    263,422    292,134    313,530    335,762

Liquidity (x)
Current ratio                               1.59       1.69       1.76       1.69       1.65
Interest cover                              79.7      114.7      702.9      856.8      985.4

Leverage
Net debt/EBITDA (x)                      net cash   net cash   net cash   net cash   net cash
Net debt/equity (%)                      net cash   net cash   net cash   net cash   net cash

Activity (days)
Days receivable                             41.8       38.0       38.1       38.6       38.5
Days inventory                             245.4      228.9      223.5      224.8      229.0
Days payable                               173.1      177.8      179.0      177.4      180.7
Cash cycle                                 114.2       89.2       82.6       86.1       86.9
Source: Company data, Nomura estimates




                                                                                                                                             23
Nomura | ITC                                                                                 April 10, 2012



India: ITC (ITC IN)
ITC is the undisputed market leader in India with 75% volume share and a higher value
share. It has a protected structure with government regulations banning new foreign
investments in the sector. The company offers solid earnings growth along with a
reasonable dividend yield.


Cigarettes still a small part of overall tobacco
Cigarette consumption in India is still only 15% of overall tobacco consumption with bidis
and smokeless tobacco being the two main segments. 51% of adult Indian males
consume tobacco. Only 11% of adult Indian males smoke cigarettes as compared to
16% who smoke bidis and 33% who use smokeless tobacco. Annual per capita adult
cigarette consumption in India is approximately one tenth of the world average.

Fig. 31: Cigarette consumption is still low in India, even compared to other Asean
countries

   2,500 

   2,000 

   1,500 

   1,000 

     500 

       ‐




Source: Company data, Nomura Research



Taxation has been high in recent years…but increases on
other forms of tobacco are positive in the long term
Excise duty on cigarettes has been on the rise with the incidences of large increases
(+15%) rising in the last 5 years. However even within this period there have been years
where excise increases have been modest to none. The company has been consistently
arguing that moderate increases along with bringing other forms of tobacco under the tax
net will be positive both for the company and the government in the long term. There
have been moves in the recent past, both at the centre and state levels, to bring bidis
and smokeless forms of tobacco under the tax net, which we believe will be positive for
ITC in the long term. In the most recent budget, the government has introduced an ad
velorem component to the existing specific duty structure for cigarettes with length more
than 65mm. In our view this will make the company more focussed on volume growth in
the long term than rely on price increases, which may bring more stability to the long
term growth trajectory of the cigarette business. In our view, there is room for cigarette
volumes to grow by 6-7% in the long term, if tax increases are moderate. We still believe
the company will be able to deliver mid teens EBIT growth in the core cigarette business
over the next 3-5 years.




                                                                                                          24
Nomura | ITC                                                                                April 10, 2012


Losses in FMCG business to trend down
ITC has been investing in growing its FMCG business with the aim of being one of the
top two players in the country. It has been able to make inroads into every segment it
has entered and is now a serious player in some of the key segments such as biscuits,
soaps and packaged foods. Sales growth for the FMCG business has been robust, but
due to the continued investment behind brand building, the segment as a whole has yet
to break even. We believe the breakeven will happen over the next couple of years,
although our estimates are conservative and do not build in the upside at this stage.

Fig. 32: Losses in the FMCG business are coming down (INRmn)

         ‐
                  2009           2010   2011        2012E       2013E        2014E
     (500)
   (1,000)
   (1,500)
   (2,000)
   (2,500)
   (3,000)
   (3,500)
   (4,000)
   (4,500)
   (5,000)

Source: Company data, Nomura Research



Dividend and Valuation
ITC has been consistently paying dividends despite the need to invest in its other
businesses such as Hotels, FMCG, Agri, Retail etc. At the current price, ITC offers a
dividend yield of 3.5% and there remains a possibility that the company may pay a
special dividend as cash flows continue to be strong, even after accounting for the
capital expenditure requirements.
On valuation, the stock trades at 22.7x FY13F EPS, which is towards the upper end of
the long-term average. In the short term, we see the stock being range bound, but ITC
remains one of our core long term Buys in the consumer space in India.


Valuation Methodology
Our target price (under review) is INR246. We value the company using a sum-of-the-
parts valuation methodology. We value the core cigarettes business at INR191 per share
based on a P/E multiple of 23x on four rolling forward quarters. Other SoTP valuations:
Hotels business at 22x, which gives a value of INR9 per share; Paper Business EV/EBIT
of 8x, which gives a value of INR12 per share; New Ventures at 3x sales, which gives a
value of INR23 per share; Agri Business at 1x sales, which gives a value of INR2 per
share; Cash and Liquid assets of INR8 per share.
Policy directives from the union government form the biggest risk to our investment view.




                                                                                                         25
KT&G Corp                          033780.KS 033780 KS

GENERAL CONSUMER
                                                                                                                 EQUITY RESEARCH




                                                                                                       April 10, 2012
We see little likelihood for a price hike                                                              Rating
                                                                                                                                 Neutral
The lukewarm earnings growth                                                                           Remains

                                                                                                       Target price
                                                                                                                               KRW 86,000
to continue                                                                                            Remains

                                                                                                       Closing price
                                                                                                       April 3, 2012           KRW 76,100
                                                                                                       Potential upside               +13.0%


Action: We maintain our Neutral rating                                                                 Anchor themes
We maintain our Neutral rating for KT&G due to our lukewarm earnings                                   Demographic changes could
growth estimate (6.4% net profit CAGR estimate for FY11-13F), and                                      affect the growth outlook of
maintain our TP of KRW86,000, suggesting 13.0% upside. The market                                      consumer-related companies in
share gain from competitors’ product price hikes and the favourable KRW                                Korea. As in Japan, we expect
depreciation seem to have been reflected in the share price already, as it                             demand for tobacco and liquor
currently trades at a 11.2x FY12F P/E, similar to its five-year historical                             in Korea to fall and cosmetics
P/E. We foresee only a very slim possibility of a price hike given no                                  and soft drink markets to
potential cost increases in the near term, as well as persistent government                            benefit.
pressure to not hike prices. KT&G has invested a total of KRW381bn in
                                                                                                       Nomura vs consensus
new businesses in FY11; but despite our high earnings assumptions for
these new businesses, we believe that they will contribute little to the net                           Our FY12F NP estimate of
profit growth for the next three years (we forecast new businesses will add                            KRW931bn is slightly above
just 2.1% to FY13F net profit). We believe Orion (001800 KS; W801,000                                  market consensus of
Apr close) and LG H&H (051900 KS; W561,000) are better choices in the                                  KRW906bn.
Korean consumer segment with their faster EPS growth and undemanding
                                                                                                       Research analysts
valuations.
Catalyst: Lack of price hikes could disappoint the market                                              South Korea Consumer Related
A price hike by KT&G (but we see little chance for one) could be the                                   Cara Song - NFIK
biggest upside risk for the stock. A KRW50/pack price hike could impact                                cara.song@nomura.com
                                                                                                       +82 2 3783 2328
the net profit by 10.7%.
Valuation: Unappealing valuation
Our TP of KRW86,000 is based on a P/E of 11.5x (5-year average) and
our 12-mth forward EPS estimate of KRW7,495. Price hikes are an upside
risk. Inefficient use of cash (M&A or new business) is a downside risk.


31 Dec                               FY10              FY11F                FY12F              FY13F
Currency (KRW)                      Actual       Old     New        Old         New      Old    New

Revenue (bn)                        3,461      3,586    3,586     3,781     3,781      3,958   3,958
Reported net profit (bn)            1,031       864      864        931         931     975     975
Normalised net profit (bn)               834    864      864        931         931     975     975
Normalised EPS                  6,073.30 6,292.57 6,292.57 6,778.79 6,778.79 7,100.10 7,100.10
Norm. EPS growth (%)                 -1.5        3.6      3.6       7.7          7.7     4.7     4.7
Norm. P/E (x)                        12.3       N/A      11.9       N/A         11.0    N/A     10.5
EV/EBITDA (x)                            7.5     8.3      7.6       7.6          6.9     7.1     6.5
Price/book (x)                           2.2    N/A       2.0       N/A          1.9    N/A      1.7
Dividend yield (%)                       4.0    N/A       4.7       N/A          5.1    N/A      5.3
ROE (%)                              22.2       17.1     17.1      16.9         16.9    16.3    16.3   See Appendix A-1 for analyst
Net debt/equity (%)              net cash net cash net cash net cash net cash net cash net cash        certification, important
Source: Company data, Nomura estimates
                                                                                                       disclosures and the status of
                                                                                                       non-US analysts.
Key company data: See page 2 for company data and detailed price/index chart.
Nomura | KT&G Corp                                                                                                                            April 10, 2012



Key data on KT&G Corp
Income statement (KRWbn)                                                                             Relative performance chart (one year)
Year-end 31 Dec                              FY09        FY10      FY11F       FY12F       FY13F
Revenue                                      3,626       3,461      3,586       3,781       3,958
Cost of goods sold                          -1,552      -1,447     -1,483      -1,540      -1,606
Gross profit                                 2,073       2,015      2,103       2,241       2,352
SG&A                                          -848        -921       -998      -1,040      -1,090
Employee share expense                         -69          46         32          26          14
Operating profit                             1,156       1,140      1,138       1,227       1,276

EBITDA                                      1,282       1,258       1,256       1,345       1,394
Depreciation                                 -126        -118        -118        -118        -118    Source: ThomsonReuters, Nomura research
Amortisation                                                                                          
                                                                                                      (%)                                    1M     3M 12M
EBIT                                        1,156       1,140       1,138       1,227       1,276
                                                                                                         Absolute (KRW)                     -7.9    -1.8 18.0
Net interest expense                            6         266          46          48          59
                                                                                                         Absolute (USD)                     -6.6    -1.8 15.3
Associates & JCEs                               0           0           0           0           0
                                                                                                         Relative to index                 -11.2    -3.7 28.5
Other income                                             -197
                                                                                                         Market cap (USDmn)              9,005.3
Earnings before tax                         1,163       1,209       1,184       1,275       1,335
                                                                                                         Estimated free float (%)          93.1
Income tax                                   -312        -375        -320        -344        -361
                                                                                                         52-week range (KRW)        85300/53400
Net profit after tax                          851         834         864         931         975
                                                                                                         3-mth avg daily turnover
Minority interests                                                                                       (USDmn)
                                                                                                                                          30.06
Other items                                                                                              Major shareholders (%)
Preferred dividends                                                                                      Industrial Bank of Korea            6.9
Normalised NPAT                               851         834         864         931         975        National Pension                    4.4
Extraordinary items                             0         197           0           0           0        Source: Thomson Reuters, Nomura research
Reported NPAT                                 851       1,031         864         931         975
Dividends                                    -360        -383        -442        -476        -499
Transfer to reserves                          491         648         422         455         476
                                                                                                     Notes

Valuation and ratio analysis
FD normalised P/E (x)                         12.2        12.3        11.9        11.0        10.5
FD normalised P/E at price target (x)         11.0        11.2        10.8        10.0         9.6
Reported P/E (x)                              12.2        10.0        11.9        11.0        10.5
Dividend yield (%)                             3.7         4.0         4.7         5.1         5.3
Price/cashflow (x)                             9.0         7.1        11.5         9.4         9.0
Price/book (x)                                 2.6         2.2         2.0         1.9         1.7
EV/EBITDA (x)                                  7.9         7.5         7.6         6.9         6.5
EV/EBIT (x)                                    8.7         8.3         8.4         7.6         7.1
Gross margin (%)                              57.2        58.2        58.6        59.3        59.4
EBITDA margin (%)                             35.4        36.3        35.0        35.6        35.2
EBIT margin (%)                               31.9        32.9        31.7        32.5        32.2
Net margin (%)                                23.5        29.8        24.1        24.6        24.6
Effective tax rate (%)                        26.8        31.0        27.0        27.0        27.0
Dividend payout (%)                           42.4        37.1        51.2        51.2        51.2
Capex to sales (%)                             4.2         3.6         7.0         5.3         5.1
Capex to depreciation (x)                      1.2         1.0         2.1         1.7         1.7
ROE (%)                                       21.4        22.2        17.1        16.9        16.3
ROA (pretax %)                                23.9        23.6        22.3        22.2        22.1

Growth (%)
Revenue                                        9.5        -4.5         3.6         5.4         4.7
EBITDA                                        -6.3        -1.9        -0.2         7.1         3.6
EBIT                                          -6.6        -1.4        -0.2         7.9         4.0
Normalised EPS                                -2.8        -1.5         3.6         7.7         4.7
Normalised FDEPS                              -2.8        -1.5         3.6         7.7         4.7

Per share
Reported EPS (KRW)                        6,163.76    7,508.07    6,292.57    6,778.79    7,100.10
Norm EPS (KRW)                            6,163.76    6,073.30    6,292.57    6,778.79    7,100.10
Fully diluted norm EPS (KRW)              6,163.76    6,073.30    6,292.57    6,778.79    7,100.10
Book value per share (KRW)               28,844.27   33,793.24   36,791.68   40,107.36   43,570.94
DPS (KRW)                                 2,800.00    3,000.00    3,500.00    3,800.00    4,000.00
Source: Company data, Nomura estimates                                                                




                                                                                                                                                                27
Nomura | KT&G Corp                                                                                      April 10, 2012


Cashflow (KRWbn)                                                                                 
Year-end 31 Dec                            FY09       FY10      FY11F      FY12F      FY13F     Notes
EBITDA                                     1,282      1,258      1,256      1,345      1,394
Change in working capital                   -187        252       -361       -118       -107
Other operating cashflow                      49        -71         -3       -136       -141
Cashflow from operations                   1,145      1,440        891      1,091      1,146
Capital expenditure                         -152       -124       -250       -200       -200
Free cashflow                                992      1,316        641        891        946
Reduction in investments                    -160       -143        -81          0          0
Net acquisitions
Reduction in other LT assets                -152       -124       -250       -200       -200
Addition in other LT liabilities
Adjustments                                    4          0          0          0          0
Cashflow after investing acts                684      1,049        310        691        746
Cash dividends                              -360       -383       -442       -476       -499
Equity issue                                   0          0          0          0          0
Debt issue                                   -10          0          0          0          0
Convertible debt issue
Others                                      -107         -1          0          0          0
Cashflow from financial acts                -477       -384       -442       -476       -499
Net cashflow                                 206        665       -131        215        248
Beginning cash                               110        317        981        850      1,065
Ending cash                                  317        981        850      1,065      1,313
Ending net debt                             -197       -862       -730       -946     -1,193
Source: Company data, Nomura estimates



Balance sheet (KRWbn) 
As at 31 Dec                               FY09       FY10      FY11F      FY12F      FY13F     Notes
Cash & equivalents                           317        981        850      1,065      1,313
Marketable securities                          2          2          2          2          2
Accounts receivable                          601        626        611        644        674
Inventories                                1,509      1,497      1,517      1,600      1,675
Other current assets                         272          8        364        366        368
Total current assets                       2,700      3,114      3,344      3,677      4,032
LT investments                               948      1,091      1,172      1,172      1,172
Fixed assets                               1,472      1,519      1,690      1,812      1,934
Goodwill
Other intangible assets                       52         52         52         52         52
Other LT assets
Total assets                               5,172      5,776      6,258      6,713      7,189
Short-term debt                               95         95         95         95         95
Accounts payable                             362        408        408        408        408
Other current liabilities                    467        422        422        422        422
Total current liabilities                    924        925        925        925        925
Long-term debt                                25         25         25         25         25
Convertible debt                               0          0          0          0          0
Other LT liabilities                         214        144        214        214        215
Total liabilities                          1,163      1,094      1,164      1,164      1,165
Minority interest                             27         42         42         42         42
Preferred stock
Common stock                                 955        955        955        955        955
Retained earnings                          2,779      3,427      3,849      4,304      4,780
Proposed dividends
Other equity and reserves                    248        258        247        248        247
Total shareholders' equity                 3,982      4,640      5,052      5,507      5,982
Total equity & liabilities                 5,172      5,776      6,258      6,713      7,190

Liquidity (x)
Current ratio                               2.92       3.37       3.62       3.98       4.36
Interest cover                                na         na         na         na         na

Leverage
Net debt/EBITDA (x)                      net cash   net cash   net cash   net cash   net cash
Net debt/equity (%)                      net cash   net cash   net cash   net cash   net cash

Activity (days)
Days receivable                             62.1       64.7       62.9       60.7       60.7
Days inventory                             360.7      379.2      371.0      370.4      372.1
Days payable                                99.3       97.1      100.5       97.0       92.8
Cash cycle                                 323.6      346.7      333.4      334.1      340.0
Source: Company data, Nomura estimates




                                                                                                                     28
Nomura | Asia tobacco                                                                                                              April 10, 2012




Appendix A-1
Analyst Certification
We, Manish Jain, Anup Sudhendranath, Janni Asman, Wilianto Ie, Tushar Mohata, Archit Singhal and Eun Jung Cara Song,
hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the
subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or
indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our
compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc.,
Nomura International plc or any other Nomura Group company.


Issuer Specific Regulatory Disclosures
The term "Nomura Group Company" used herein refers to Nomura Holdings, Inc. or any affiliate or subsidiary of Nomura Holdings, Inc. Nomura
Group Companies involved in the production of Research are detailed in the disclaimer below.



Issuer name                        Ticker      Price          Price date        Stock rating     Sector rating    Disclosures
                                   001800
Orion Corp                         KS          KRW 792,000 05-Apr-2012          Buy              Not rated        A6
                                   033780
KT&G Corp                          KS          KRW 80,000     05-Apr-2012       Neutral          Not rated        K31,A10
                                   051900
LG Household & Health Care         KS          KRW 582,000    05-Apr-2012       Buy              Not rated
Gudang Garam                       GGRM IJ     IDR 58,050     05-Apr-2012       Buy              Not rated
ITC                                ITC IN      INR 227        04-Apr-2012       Buy              Not rated
British American Tobacco (M)       ROTH MK     MYR 54.98      05-Apr-2012       Reduce           Not rated


A6   A Nomura Group Company expects to receive or intends to seek compensation for investment banking services from the issuer in the next
     three months.
A10 A Nomura Group Company is a registered market maker in the securities / related derivatives of the issuer.
K31 Nomura Financial Investment (Korea) Co., Ltd. is a liquidity provider (LP) or LP & issuer for ELW which the underlying is CJ Corp
    (001040.KS), and holds 3,529,950 warrants as of 05-Apr-2012.

Previous Rating

Issuer name                                                                        Previous Rating                Date of change
Orion Corp                                                                         Strong Buy                     26-Sep-2008
KT&G Corp                                                                          Reduce                         30-Mar-2010
LG Household & Health Care                                                         Neutral                        05-Dec-2011
Gudang Garam                                                                       Not Rated                      24-Aug-2011
ITC                                                                                Neutral                        29-Oct-2009
British American Tobacco (M)                                                       Neutral                        05-Oct-2010




                                                                                                                                             29
Nomura | Asia tobacco                                                                                                                                  April 10, 2012



British American Tobacco (M) (ROTH MK)                                             MYR 54.98 (05-Apr-2012) Reduce (Sector rating: Not rated)
Rating and target price chart (three year history)
                                                                                                              Date        Rating   Target price   Closing price
                                                                                                              16-Feb-12                44.50           52.30
                                                                                                              06-Jan-12                44.20           48.76
                                                                                                              30-Mar-11                42.60            48.08
                                                                                                              05-Oct-10   Reduce                       47.50
                                                                                                              05-Oct-10                42.00           47.50
                                                                                                              12-Feb-10                42.10           42.18
                                                                                                              20-Nov-09                42.80           44.76
                                                                                                              20-Oct-09                44.01           45.02




For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of MYR44.50 is DCF-derived based on the company’s discounted free cashflow. We currently
assume a risk-free rate of 4% with an equity-risk premium of 6%, a beta of 0.7 and a terminal growth rate of 0.5%. This implies a
P/E of 17.1x for FY12F at our TP of MYR44.50, in line with its historical average P/E of ~17x.
Risks that may impede the achievement of the target price Upside risks to our TP and earnings forecast include a halt in
industry volume contractions, lower-than-expected downtrading and illicit trade, a possibility of BAT further recovering market
share in the value-for-money segment of the market and no excise-duty hike in 2012F.


Gudang Garam (GGRM IJ)                                                             IDR 58,050 (05-Apr-2012) Buy (Sector rating: Not rated)
Rating and target price chart (three year history)
                                                                                                              Date        Rating Target price     Closing price
                                                                                                              30-Jan-12             75,000.00        55,500.00
                                                                                                              24-Aug-11   Buy                        54,000.00
                                                                                                              24-Aug-11             65,000.00        54,000.00




For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price of IDR75,000 implies FY13F P/E of 20x. It is at a 23% discount to our DDM valuation
with a discount rate of 12.5% and a long-term growth rate of 9%. The dividends are discounted back to 2013F. We expect a
dividend yield of 5% for 2013F
Risks that may impede the achievement of the target price Key downside risks to our view include crop failure causing a
rise in raw material prices, government intervention with negative effects, and global economic setback, which might cause
credit tightening and affect company profitability.




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Nomura | Asia tobacco                                                                                                                                April 10, 2012



ITC (ITC IN)                                                                       INR 227 (04-Apr-2012) Buy (Sector rating: Not rated)
Rating and target price chart (three year history)
                                                                                                           Date        Rating    Target price   Closing price
                                                                                                           23-Jan-12                 246.00          204.60
                                                                                                           10-Aug-11                 229.00          197.10
                                                                                                           29-Oct-10                 200.00          171.20
                                                                                                           23-Jul-10                 176.00          150.82
                                                                                                           29-Oct-09   Buy                           129.65
                                                                                                           29-Oct-09                 309.00          129.65
                                                                                                           29-Jul-09   Neutral                       118.85
                                                                                                           29-Jul-09                 240.00          118.85




For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our target price is INR246. We value the company using a sum-of-the-parts valuation methodology.
We value the core cigarettes business at INR191 per share based on a P/E multiple of 23x on four rolling forward quarters.
Other SoTP valuations: Hotels business at 22x, which gives value of INR9 per share; Paper Business EV/EBIT of 8x, which
gives a value of INR12 per share; New Ventures at 3x sales, which gives a value of INR23 per share; Agri Business at 1x sales,
which gives a value of INR2 per share; Cash and Liquid assets of INR8 per share
Risks that may impede the achievement of the target price Policy directives from the union government form the biggest risk
to our investment view.


KT&G Corp (033780 KS)                                                          KRW 80,000 (05-Apr-2012) Neutral (Sector rating: Not rated)
Rating and target price chart (three year history)
                                                                                                           Date        Rating    Target price   Closing price
                                                                                                           12-Dec-11                86,000.00      83,500.00
                                                                                                           10-Jan-11                66,000.00      64,100.00
                                                                                                           01-Oct-10                65,000.00      67,700.00
                                                                                                           21-Apr-10                59,000.00      59,500.00
                                                                                                           30-Mar-10   Neutral                     62,900.00
                                                                                                           30-Mar-10                61,000.00      62,900.00
                                                                                                           20-Jan-10                63,000.00      68,100.00
                                                                                                           28-Dec-09                61,000.00      67,500.00
                                                                                                           17-Dec-09   Reduce                      66,600.00
                                                                                                           17-Dec-09                59,000.00      66,600.00
                                                                                                           07-Dec-09                65,000.00      68,300.00
                                                                                                           04-Jun-09   Neutral                     66,300.00
                                                                                                           04-Jun-09                74,000.00      66,300.00




For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our TP of KRW86,000 is based on a P/E of 11.5x (the 5-year historical average) our 12-month forward
EPS estmate of KRW7,495.
Risks that may impede the achievement of the target price Possible price hike is an upside risk. Inefficient use of cash
(either M&A or new business) is a downside risk.




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Nomura | Asia tobacco                                                                                                                      April 10, 2012


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SECTORS
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Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan
STOCKS
Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price,
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circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company.




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Nomura | Asia tobacco                                                                                                                 April 10, 2012


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SECTORS
A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive
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company's earnings differ from estimates.




                                                                                                                                                33
Nomura | Asia tobacco                                                                                                                                           April 10, 2012


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