I

ndonesia'€™s largest cigarette manufacturer Hanjaya Mandala (HM) Sampoerna concluded the first half (H1) of the year flat amid the gloomy future cigarette business, with no room to grow due to a series of regulations and rising costs that hamper the industry.

Sampoerna reported a 7.98 percent year-on-year increase in its net revenues to hit Rp 39.09 trillion (US$3.37 billion) in between January and June. Its net profit, meanwhile, stayed at Rp 5 trillion.

MNC Securities analyst Reza Nugraha attributed Sampoerna'€™s sluggish H1 performance to rising costs, higher clove prices and a number of regulations effective this year, which not only trimmed companies'€™ profits but also restricted them advertisements.

'€œSampoerna has to face not only weakening demands for cigarette, but also burgeoning costs resulting from higher clove prices, taxes and excises,'€ Reza said.

The company'€™s cost of goods sold went up by about 11 percent from Rp 26.17 trillion in H1 last year to Rp 29.24 trillion in the same period this year. Its selling expenses rose by about 15 percent to Rp 2.52 trillion.

'€œOutlook for the second half [H2] of this year, and for future years, might remain dim, given that cigarette companies will find it hard to reach new markets and entice first time smokers, with a new regulation that mandates unappealing graphics on packaging that might spook novice smokers,'€ Reza explained.

The continuously increasing excise has been attributed as the main reason cigarette makers saw suppressed profit margins. While the government decided not to raise cigarette excise tax in 2014, they introduced a new regulation imposing a 10 percent tax from excise known as '€œregional cigarette tax'€ in exchange.

The obligation for companies to put graphic health warnings (GHWs) on packaging has also become effective since June and is expected to make it difficult for companies to raise awareness of their brand and to introduce new products, as GHWs must cover 40 percent of cigarette cartons.

Sampoerna, whose majority shareholder is Philip Morris International Inc., claims that its market share of hand-rolled clove cigarettes has consistently dropped, from 30.4 percent in 2009 to 23.1 percent last year, despite retaining its position as market leader in the segment.

'€œWith such a condition, cigarette manufacturers can only rely on efficiency to save their businesses. That'€™s what happened when Sampoerna laid off thousands of workers last month,'€ Reza continued. Sampoerna last week closed its factories in Lumajang and Jember, East Java, affecting more than 4,000 workers.

Besides Sampoerna, another major cigarette firm, Bentoel Internasional Investama, also suffered from higher clove prices as well as burdening regulations, with its net loss surging by 59.55 percent year-on-year (y-o-y) to Rp 856.53 billion, despite a 19.87 percent increase in its net revenue to hit Rp 6.76 trillion.

Gudang Garam, on the other hand, managed to boost its net profit by 22.42 percent y-o-y to Rp 2.73 trillion, which Reza said was due to the company'€™s working efficiency strategy and the advantage of proximity between its factory in Kediri, East Java, and clove plantation.