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Customs Tariffs: Bane of Cigarette Firms

The share price of cigarettes began to "fly" again earlier this week after being pressured by Finance Minister, Sri Mulyani Indrawati's new tax regulations. With an average rate of 12.5%, Sri Mulyani has increased customs prices for cigarettes and this regulation will begin shortly on February 1, 2021. This new policy will most likely be felt by the shares of PT HM Sampoerna Tbk (HMSP) and PT Gudang Garam Tbk (GGRM). Other companies such as PT Bentoel International Investama Tbk (RMBA) and PT Wismilak Inti Makmur Tbk (WIIM) were also affected though the effect was not as significant as compared to HMSP and GGRM. Samuel Securities Analyst, Yosua Zisokhi, claims that this decline is caused by the increase of taxes in 2021, which was by all means, beyond market expectations. "Investors assume that the increase in the customs tariffs will be small next year, but it turns out that SKM is up 16% and SPM is up 18%. So, it's quite natural for its share price to decline," said Yosua when contacted by, Thursday (10/12). As of now, the new tax policy drives investors to re-analyze the future of the cigarette industry, especially after the Covid-19 pandemic is over. Nevertheless, in times where the purchasing power is at its lowest, the rise in tariffs is conversely rather high.

As Finance Minister, Sri Mulyani Indrawati decided to raise the cigarette customs rate in 2021 on Friday (12/11), the cigarette companies’ shares immediately fell, even though it had previously been rumored that there would be no rise in the customs tax. There were 5 listed cigarette manufacturers that experienced a downward movement on the same day, WIIM fell 0.84%, RMBA fell 2.16%, ITIC fell 2.27%, HMSP fell 4.49%, and GGRM fell 5,19%. It’s obvious that the most affected are PT HM sampoerna Tbk (HMSP) and PT Gudang garam Tbk (GGRM). Not only these companies are affected by the increase in cigarette customs tax, tobacco farmers also experience the same anxiety. On Sunday (12/13) the Indonesian Tobacco Farmers Association admitted to being disappointed by Sri Mulyani's decision. Agus Pamudji, Chairman of the APTI Leadership Council, said tobacco farmers objected to the new regulation especially during the Covid-19 pandemic. According to Agus, the government was expected to provide funding for the restoration of depressed tobacco cultivation, not to give farmers more weight on their shoulders. "We are very disappointed, in times of pandemic, the government should have thought about infrastructure policies for the farmers recovery, but instead it turned around," Agus also explained that tobacco farming is different from the others. "If the selling price of production is set to increase, it will weaken local absorption and destroy prices," said Agus.

After the large drop following the Minister's policy, cigarette firms' shares have started to rebound starting on Monday (12/14). At the closing of trading on Monday, HMSP grew significantly by 4.5% to 1,625, while GGRM shot up by 3.87% to 42,950. Eventually, on the next day, HMSP declined again to 1,595, with GGRM also experiencing a drop to 42,000. The fall has remained short, and on Wednesday (12/16), both shares climbed up again for 0.31% and 0.48%, respectively. The increase in customs rates is said would not impact the share price for a long time. According to MNC Securities Analyst and Head of Research Edwin Sebayang, the cigarette share price has managed to rebound because the effects of the customs are generally short spanned. "Cigarette companies are usually able to adjust the increase in customs rates to cigarette prices at the consumer level, so their income prospects are usually quite good. The cigarette market could be considered large as well, amounting to around 47 million consumers," said Edwin. Likewise, Mega Investama Analyst Hans Kwee noted, "Even if the cigarette tax increases, the issuer would still be able to survive, so that their value is relatively well maintained. The prospects of those who want to buy their shares are also still quite great." Overall, customs tariffs do affect the share price of tobacco firms, but this doesn't last long due to the vast power of the market itself.


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