Gudang Garam (GGRM IJ) results are broadly in line with our and consensus expectation - CLSA

Top-line up by 10% YoY, largely driven by price increase of ~7-8%, paired with volume growth of ~2-3%. Gross profit jumped by 18% YoY, as COGS of which 75% are excise tax, only increased by 8% YoY. As such, as operating expense/sales ratio remains flat at 8%, EBIT and earnings rose tremendously by 25-29% YoY, respectively.

· Margins remained flat on quarterly basis, but expand by ~2% on yearly basis for gross, operating, and net margin. This is what we like about GG, as benign excise tax increase and stable operating expense should translate to robust earnings growth. We thus believe that our gross and operating margin assumption of 23% and 16% might easily be achieved.

· Inventory turnover days slightly declined on quarterly basis, to 217 days in 2Q11 from 223 days in 1Q11 – relatively higher for cigs companies but should provide cushion during soaring clove and tobacco prices. Regarding the clove and tobacco inventory, GG has sufficiently kept its raw materials until YE11.

· However, due to the soaring domestic prices, they started to import their raw materials, chiefly from China, Zimbabwe, and Malawi (and still do not see much supply). As for 2012, it will be depending on the harvest next coming month, providing some risks to GG's margin next year. Harvesting for cloves starts as early as November, while around September-October for tobacco. Note that tobacco made up around 60% of company's raw materials, while some 40% of cloves.