August 09, 2012 THAILAND EQUITY Investment Research Daily 2QFY12 Results Preview Thailand Research Team +66 (2) 862 9999 ext.2030 Thai Rung Union (TRU) 2Q Preview: Expect a Weaker qoq Result • 2Q12 earnings expected to come in weaker, qoq • TRU is ramping up assembly for Nissan and painting more for Isuzu Buy • Expect a notable back log in order for eco-cars and commercial vehicles Fair Value THB14.00 • We recommend a Buy for with a TP of THB14.00 (+28%) given our Previously THB12.30 increasing confidence in the auto sector. Price THB10.90 2Q12 earnings expected to be slightly weaker, qoq. In 1Q12, TRU posted a net profit AUTO of THB125.2m and EPS of THB0.25 (+67% yoy) and THB73.3m and EPS of THB0.15 for Thai Rung Union Car Plc is a Thai-owned and managed group whose business is 2Q11. In May 2012, TRU signed a deal with Nissan Motors to assemble an existing ranging from product design and Nissan model (excluding the interior and outside trimmings). The testing of its assembly development through the productions of lines and ramping up of production will result in some additional expense in 2Q . Since dies and jigs and the manufacture , June TRU has been working to achieve 2,000 Nissan vehicles per month but this must assembling and painting of automobiles and rise to 4,000 in the months to come. Additional holidays in 2Q as well as a small impact parts. from the rise in minimal salary will also impact 2Q earnings (a relatively small proportion of
Stock Statistics salaried workers receive the minimum salary). Overall, we expect in the region of Bloomberg Ticker TRU TB THB100m (-18% qoq). If so, this would account for about 47% of our FY forecast. Share Capital (m) 492.4 Market Cap (USDm) 169 2H12 is promising. Besides assembling for Nissan, TRU will increase body painting for 52 week H │L Price (Bt) 11.10 4.38 Isuzu, painting 800 pick-ups per month from 500 currently. The co mpany is also painting 3mth Avg Vol (‘000) 1,551.4 vehicles for General Motors, as well as parts for several manufacturers. Body and parts YTD Returns (%) 96.4 Beta (x) 0.82 painting is an area that TRU sees itself focusing on in a much more significant way going forward. The company held no interest bearing debt at the end of 1Q. Major Shareholders (%) Mrs. Pranee Phaoenchoke 49.1 Installing machinery at the Amata Industrial Estate. TRU has two factories. One in Ms. Kaewjai Phaoenchoke 6.5 Thonburi, which is close to Bangkok and the other at the Amata Industrial Estate. The Mr. Wuttichai Phaoenchoke 6.2 Thonburi facility is larger and will account for about 60% of 2012 sales. This is where most Mr. Sompong Phaoenchoke 5.4 of TRU’s painting is carried out but orders are growing and capacity will become insufficient soon. The company’s other factory is a 28,000 sq. meter facility situated on 20 Share Performance (%) rai of land, and is principally used for body assembly, welding, pressing and stamping . Month Absolute Relative 1m -8.3 1.4 TRU is currently busy installing a lot more machinery to meet its objectives here. Many of 3m 43.1 43.6 these pressed and stamped parts are used in the assembly. TRU can still expand capacity 6m 71.2 52.0 at Amata and currently estimates utilization at about 70% (this is somewhat of a moving 12m 57.9 37.6 target as extra shifts can be worked). TRU also hopes to secure body assembly work for General Motors, for whic h TRU has assembled for before, while there’s no shortage of 6-month Share Price Performance welding jobs, parts and tools pressing across the parts industry. 12.00 11.00
10.00 Recommend Buy. TRU’s results should be published this evening. We believe that any 9.00 weakness in TRU’s share price is a buying opportunity as we expect earnings to have 8.00 bottomed out. Given our increasing confidence and conviction in the sector, backed by a 7.00
6.00 strong order-book visibility and tight capacity utilization amongst the big car makers , we 5.00 believe that this counter can trade on a more favorable valuation than we first looked at 4.00 the sector. Over the next 12 months we believe tha t TRU can trade up to 12x its 2013 3.00 st 2.00 PER which places the stock on a TP of THB14.00 (+28%), up from THB12.30. As a 1 tier Feb-10 Aug-10 Feb-11 Aug-11 Feb-12 Aug-12 supplier TRU can be re-rated to trade in line with the historical PER band of the sector while the auto-parts sector itself stands a reasonable chance of a further positive re-rating.
FYE Dec. (THBm) FY10 FY11 FY12f FY13f FY14f Revenue 1,970.2 2,054.8 2,897.2 3,505.7 4,050.6 Net Profit 186.4 186.2 469.7 575.3 644.5 % chg y-o-y n.a -0.1 152.2 22.5 12.0 EPS (Bt) 0.37 0.38 0.95 1.17 1.31 DPS (Bt) 0.25 0.25 0.43 0.53 0.59 Dividend yield (%) 2.8 2.8 4.8 5.8 6.5 ROE (%) 7.2 7.0 17.3 19.2 19.1 ROA (%) 11.2 10.0 17.3 25.6 27.4 PER (x) 29.4 28.7 11.5 9.3 8.3 BV/share (Bt) 5.3 5.4 6.1 6.5 7.2 P/BV (x) 2.0 2.1 1.8 1.7 1.5 EV/ EBITDA (x) 16.1 15.2 9.1 7.6 6.6
OSK Research | See important disclosures at the end of this report 1
August 9, 2012
A booming market improves diversification of revenues . TRU sees ample room for growth going forward and the Thai auto market dynamic enough to counteract expansion risk to some degree. The Thai government waived excise tax on new car sales of less than THB1m which can save up to THB100,000 for first time car buyers. Although this incentive will expire at the end of 2012 it includes all new cars ordered before 01 st Jan 2013 with no deadline for delivery—this is because the government has been advised of a developing back-log given auto-makers’ capacity constraints. This is one development since our last report, and it’s reasonable to assume that the smaller-car related capacity will remain tight until about mid-2013. There is also a back-log on 3tonne commercial vehicles in the domestic market, sales for which grew around 50% in 1H12, yoy. This back log is expected to reach about twice the number delivered in 1H12 by year-end. The export market also continues to grow via vehicle relocation from Japan due to the stronger yen, and from Europe due to less domestic demand there. ASEAN demand is also growing strongly while high growth in agricultural vehicle demand and more and more industrial vehicles being assembled and painted here in Thailand is likely to keep capacity tight through 2013 and into early 2014. Customer diversification may ease expansion risks. About 22% of revenues this year will come from Nissan, while GM and Isuzu will be in the teens. About 15% or revenue is from the body painting of Komatsu and Kobelco construction vehicles. A more definitive expansion into specialized body and parts painting will permit further revenue diversification. The pressing of parts and stamping is already a well diversified niche of TRU for which the company has its own patented technology and we suspect risks to further expanding these lines should be minimal and relatively inexpensive.
Profits masked by showrooms TRU may leverage off its relationships with manufacturers to open a greater number of distribution show rooms in Thailand. However, at the forefront of TRU’s expansion strategy would appear to be painting as well as pressing, and parts manufacturing. One positive aspect of selling cars is that it’s a high sales but low margin business which can camouflage the GPM of core operations, supporting pricing power. Sales break-down Thai Rung Union is a turnaround counter focusing on tools, OEM parts and a 1 st tier contract assembler for both semi and complete components, with only about 5% of revenue derived from its once famous modified Isuzu pick-up. Currently 55% of revenues are from tooling and OEM parts; and 31% is from integrated assembly & painting including construction machinery. TRU expects revenues can grow 40% in 2012, yoy, which is in line with the entire Thai auto and parts sector, and that TRU’s revenues from assembly and painting will outperform its other businesses for the foreseeable future.
Figure 2: Revenue Breakdown & Export of Complete Built-up by Brands 1Q12
Remark: Honda had no export volume in 1Q12 because it has not yet recovered from the flood. Source: TRU & The Federation of Thai Industries
See i mpor t ant di scl osur es at t he end of t hi s publ i cat i on OSK Research