A Cornered Rat

A Cornered Rat

A week ago, I stumbled upon an interesting post from Vice which titled “Putin’s ‘Cornered Rat’ Story Might Be a Warning About His Next Move”?which discuss a story told by Russia’s President Vladimir Putin encountered a rodent during his childhood.

The post discusses more on Putin’s view and politics, but I’m more interested in the Cornered Rat story.



Putin recalled chasing big rodents with a stick around his dismal, communal apartment building in St. Petersburg, then known as Leningrad:

There, on that stair landing, I got a quick and lasting lesson in the meaning of the word ‘cornered’. There were hordes of rats in the front entryway. My friends and I used to chase them around with sticks. Once I spotted a huge rat and pursued it down the hall until I drove it into a corner. It had nowhere to run. Suddenly it lashed around and threw itself at me. I was surprised and frightened. Now the rat was chasing me. It jumped across the landing and down the stairs. Luckily, I was a little faster and I managed to slam the door on its nose.”

A similar quote from Winston Churchill, One of UK’s Prime Minister during the World War 2:

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Quote by Winston Churchill


The Logic of “Cornered Rat”

I love reading Eastern Philosophies books, including the?Book of Changes?and?Art of War. In the Art of War, there’s a special section to outline the strategy of not driving opponents to deadly desperation.


Here’s the logic:

  • Cornering an enemy and left a way out, the opponent will flee.
  • Cornering an enemy and no way out, only 2 options left: Fight or Die.

The principle is that a “cornered rat” may turn on its pursuer with inconceivably deadly force if it is driven to a frenzy in absolute despair. So, Putin’s story made me remind of the content from Book of Changes.

A cornered Man will also act the same as a cornered rat, but how about a cornered company?
A pursuer might give chance to prey for a way out, but how about company in a sunset industry?
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Fall of Constantinople: The Cornered Byzantium


So, here’s a story of cornered companies with no way out.



A Story of Cigarette Industry

Kretek Cigars

Indonesia is one of the largest tobacco markets in the world. Just like culinary, there’s unique kind of cigar which called ‘Kretek Cigarette’.

Kretek founded in Central Java which emerged during Dutch colonialization at 19th century. The practice was to roll, by hand, a compound of tobacco, cloves, and cocoa in a dry corn husk wrap, which gives a honeyed flavour (when Europeans try kretek for the first time, they think of the smell of Christmas). Fun fact, ‘Kretek’ is a burning sound of the cigar which sounded like cracking effect on firewood’s at campfire.

We can say kretek has a long history in Indonesia which was a habit of lower-class of society (just like lobsters’ history!) and part of Indonesia’s cultural identity.

So, what’s so special about kretek? It’s very popular in rural areas as this type of cigar is cheap. The amazing part is kretek burns slowly and self-extinguish. But on the negative side, kretek contains high concentration of tar & nicotine which around 4x stronger than Marlboros ( Marlboro is considered as ‘white cigar’, which doesn’t contain any clove oil in production).

While cigarette smoking is declining throughout the world, in Indonesia, the industry continues to thrive. Indonesia has one of the highest smoking rates in the world and is currently one of the biggest producers of tobacco worldwide.

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A Man Enjoying the Kretek Cigars


The Cornered Industry

Do you know? Only Indonesia that allowed cigarette advertisement while the other countries banned completely. However, it is prohibited to show cigarettes and advertising must include smoking warning messages. This business has made some renowned brands such as? PT HM Sampoerna Tbk. ?with their famous?Sampoerna A Mild & Marlboro,? PT. Gudang Garam Tbk ?with their top kretek filter,? PT DJARUM ?with?Djarum Super and L.A.,? PT Wismilak Inti Makmur Tbk ?with?Diplomat,? Bentoel Group - A Member of British American Tobacco , and many more.

Cigarette industry itself contributes around?0.8% of Indonesia GDP?and keeps growing. With the growth of cigar producers, the customer base expands as well (which is the main problem here). Indonesia is challenged by health issues and death caused by smoking, which increasing each year. The demography shows that younger generation also start to smoke, as early from 7–11 years old.

How’s the government action to this? They imposed a cigarette excise tax to reduce amount of consumptions. The tax slowly shows the impact, which in 2023 cigarettes’ price is heavily inflated compared to 10 years ago (average excise tax increase?10% annually).

As for tobacco and cigarette producers, this phenomenon is equivalent to a doctor announcing that you suffer from?stage 4 cancer.

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Increasing Tobacco Tax Excise Annually


Not One, but Bunch of Cornered Rats!

What’s the fun part in a predator cornering a prey??The spectator!


As an investor, my homework is to observe companies and did due diligences. After I learned the nature of Tobacco Industry and the current challenge they’re facing, definitely an interesting event to watch; made me remember of Breaking Bad.

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Guy Recording A Fight

From the logic we discussed before, a cornered rat will either fight or die. Let’s see how each company respond to the tax problem (I only used public companies, so Djarum won’t be on the list) from what I observed:

  1. ITIC/ Indonesia Tobacco & WIIM/ PT Wismilak Inti Makmur Tbk

  • This company produced products for low segments and affected by the lowest tier of tax excise (basically the higher production rate, more tax excise incurred to the company).
  • Both of these companies enjoy the current situation, as they are able to achieve growth in Net Income


2. PT. Gudang Garam Tbk

  • Gudang Garam’s also aim the same target market as Wismilak, which is the middle to lower segments in tier 2 & 3 cities.
  • The case is, Gudang Garam’s production rate is more than 3 billion cigarettes each year, which falls in highest taxed category. This led to Gudang Garam suffers from declining in net profit margin.
  • Last year, they’re trying a new business which is an airport; Kediri/?Dhoho International Airport; which is the first private owned airport in Indonesia with investment value around?10.8 trillion rupiah!


3. PT HM Sampoerna Tbk.

  • Sampoerna has a good backup; Philip Morris International ; which owned 92.5% of Sampoerna.
  • Currently they’re trying to win the market using brand new product: the?IQOS. This new segment is a line of heated tobacco and electronic cigarette products manufactured by Philip Morris International (PMI). It was first introduced in November 2014 in Japan and Italy.


Why become an Investor is an advantage?

Let’s start with?Gudang Garam.

The construction of airport in Kediri isn’t a new thing (it dated back to 2012 and 2018 where the president declined the airport project to be included in National Strategic Projects).

Basically, what Gudang Garam do is?unrelated diversification?(will discuss in different story for the details). We know that tobacco industry is a one way out (currently) and the company obviously struggling with the tax excise; the rate of tax increase is more than selling price with declining in consumer’s purchasing power (Sadly, this means Gudang Garam lost their price-transferring moat). Don’t forget, tax excide is programmed to increase annually. The best way is to diversify, either in other kind of tax-free products or complementary.

Here is a picture shows that tax excise contributes to 80% of Gudang Garam’s production costs!

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Excise Tax contributed more than 80% of Production Costs


Some people questioned,

Why a tobacco producer build an airport?

We simply can’t judge,?yet.


Do you know Coca Cola, the famous soft drink company?

If Coca Cola happens to build a new line in fast food chain with Coca Cola as the serving drinks, it totally makes sense. But what if I tell you that Coca Cola instead acquired Columbia Pictures in 1982 with 750 million USD?

They had a flat performance for 7 years until Coca Cola sold the Columbia to Sony, which resulted in profit (in my opinion, this just a down scoping strategy for past mistake).

So, who knows, let’s just watch. Afterall you’re the?spectator.


How about HM Sampoerna?

Their strength is easiness in core-product transfer due to their strong backup. IQOS doesn’t take long time to be launch in Indonesia. Currently their placing mini stand in shopping malls, cafes, and other high-end entertainments centre. The case is according to WHO, which I will?quote:

“Currently, there is no evidence to demonstrate that HTPs are less harmful than conventional tobacco products. Some tobacco industry-funded studies have claimed that there are significant reductions in the formation of and exposure to harmful and potentially harmful constituents relative to standard cigarettes. However, there is currently no evidence to suggest that reduced exposure to these chemicals translates to reduced risk in humans. Therefore, additional independent studies will be required to substantiate claims of reduced risk/harm.”

With that, IQOS currently not yet able to escape from the tax trap.


So, Wismilak and Indonesian Tobacco is the winner?

Because both are relatively smaller size producers compare to Gudang Garam and Sampoerna (plus their lower tier in excise tax), we can say they’re currently on?advantage of current situation. But hold your breath because the storm ain’t coming yet:

  • Have I mentioned that tax excise?will keep increasing? How Wismilak and others will perform?in long term?
  • Assuming Wismilak is growing, there’s a certain time in the future where Wismilak is ‘promoted’ to the high paying tier.
  • The challenge of Indonesians?buying power, they’re starting to buy super cheap cigars (which is shockingly cheap!)
  • The challenge of illegal cigars, which they’re much cheaper compared to previous brands I mentioned, and the?amount of illegal producers?are a lot.

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Illegal Cigarettes is a Challenge in Indonesia’s Economy

The Conclusion

To be honest, I’m amazed by how tobacco producers still can keep up with their performance, despite heavy challenges in the industry. In my point of view, I’m clearly watching the battle of a cornered rat. The question is:

Which rat can escape?

If one can escape, either 2 outcomes may possible happens:

  • The company succeed in?unrelated diversification (gives a strong conglomerate moat).
  • Or the company found?Blue Ocean.

The answer to this question might take years or even decade, I simply don’t know.


But the only thing we can do is to watch, observe, and follow each ‘rat’s story’.

Best investment that you can possibly make in stock market is the turnaround company and all you must do is?observe and be patience.


That’s all folks.

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