Pakistan Automobile Sector
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Pakistan Automobile Sector REP -300 Glory Lies beyond the Horizon Apr 19, 2021 AprilREP 19, 300 2021 Back in the ‘Good Old Days’ Askari Bank Limited We believe Pakistan Automobile manufacturing companies are expected to remain in Pakistan Automobile Sector the limelight due to various factors which include i) Cheaper auto-financing rates and Over Weight low interest rate era which is likely to keep volumetric growth upbeat, ii) Revitalization Sector Market Cap (PKR bn) 333 of economic activity in full swing which will improve purchasing power parity of Sector Market Cap (USD mn) 2,181 consumers and will directly impact automobiles’ demand, iii) Higher inflows of dollars No. Listed of Companies 11 in terms of remittances, also increasing consumer spending, iv) Stringent regulatory Weight in KSE100 Index 4.4% requirements resulted in slowdown in used car imports is which providing room to new players and existing players, v) Overwhelming response on new models (Toyota Yaris, Category-wise Passenger Cars and LCV Unit Sales KIA Picanto, KIA Sportage, KIA Sorento, Changan Alswin, MG HS, Proton X70, Hyundai Units (000) FY20 FY19 YoY Elantra and Hyundai Tucson), vi) Increased spending in rural areas especially from 1300cc & Above 39.39 100.96 -61% subsidized rate for farmers, elimination of GST on tractors and better yield on 1000cc 19.29 55.38 -65% agricultural output, and vii) Electric Vehicle policy which could prove to be a game- Below 1000cc 32.62 33.67 -3% changer for the automobiles sector as this will attract new players to set up automobile Passenger Cars 91.30 190.00 -52% manufacturing plant in Pakistan. LCVs + 4x4 20.97 51.10 -59% Total 112.27 241.10 -53% INDU: Our top pick in the AHL Auto Universe is Indus Motor Company Ltd. (INDU) with Dec’21 Relative Performance target price of PKR 1,524/share, providing an upside of 35% from previous day closing AHL Autos Universe KSE100 200% of PKR 1,130/share; we recommend ‘BUY’ call on the stock. Our revision in investment 180% thesis is based on massive growth in volumes, support from loyal customers, launch of 160% new model which should keep volumes upbeat, and strong presence in market. 140% 120% HCAR: 100% After tweaking some macro-economic assumptions we revise upwards our Dec’21 DCF 80% based target price for HCAR to PKR 363/share, providing an upside of 21%. Hence, we 60% have a ‘BUY’ call on the stock. Key revision in our assumptions were change in Jul-20 Apr-20 Oct-20 Apr-21 Jan-21 Jun-20 Feb-21 Mar-21 Aug-20 Sep-20 Nov-20 Dec-20 volumetric assumption and change in margins assumption due to stable PKR/USD and May-20 better economies of scale. We have incorporated launch of the new Honda City which Source: Bloomberg will be a key trigger for the company. Analyst: PSMC: Arsalan Hanif After adjusting our current macroeconomic assumptions, we change our stance from D:+92 21 3246 2589 “Sell” to “Buy” with our target price for Pakistan Suzuki Motor Co. (PSMC) at PKR UAN: +92 21 111 245 111, Ext: 255 416/share, upside of 28% to its last closing price. We have incorporated the new model F:+92 21 3242 0742 of Swift from 3QCY21, reduction in short-term borrowings amid clearance in trade debt, E: [email protected] and growth in volumes amid lack of competition in small car market segment. www.arifhabibltd.com MTL: We revise upwards our DCF-based Dec’21 target price of Millat Tractors Ltd. to PKR 1,419/share. A 31% upside potential is available based on the scrip’s last closing, we Best Domestic Equity House T op 25 Listed Companies recommend “BUY”. We project i) Tractor sales by the end of this year to clock-in at ~35k units and generate a 5-yr CAGR of 22%, and ii) Drastic increase in exports which earn high margins compared to local sales. We expect margins to remain afloat at an Best Equity Research C orporate Finance House average of 26% by FY25F. Analyst: 2020 of the Year: 2020 Last Closing as of 16-Apr-21 Pakistan Automobile Sector AIDP policy – A key catalyst for some companies: The final year of Automotive Development Policy (2016-2021) is showing its full effects as new and existing players are trying to make the most out of it. We believe launch of 15+ new cars are expected in CY21 together with arrival of new names in the automobile industry which can become a key catalyst for some companies along with demand of auto parts to increase drastically. Lower auto-financing rates to improve demand Post-outbreak of Covid-19, State Bank of Pakistan adopted key measures to mitigate its impact such as reduction in the policy rate to help support credit flows in the economy. The basis for reduction in policy rate was primarily to support aggregate demand, massive decline in international oil prices, slowdown in demand resulting in decline in key commodity prices, and weakness in global demand. As per data published by State Bank of Pakistan, auto-financing during last five years increased with CAGR of 22% from PKR 100bn in Feb’16 to PKR 273bn in Feb’21. Lower auto-financing rate is directly proportional to auto sales growth. During low interest rate era industry sales volumes almost doubled from 136,888 units in FY14 to 258,632 units in FY18. We believe, stable policy rate will be material positive for the automobile sector given auto-financing accounts for approximately 40-50% (as per management of INDU and HCAR) of total automobile sales and lower rates will improve sales volumes drastically. Figure: 01 Policy Rate vs Industry Volumes Industry Volumes Average Policy Rate (RHS) (000 Units) 290 12% 265 11% 240 10% 215 9% 190 8% 165 140 7% 115 6% 90 5% FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21E Source (s): PAMA, SBP, AHL Research Inadequate capacity of new players and manufacturing constraints of existing players increased backlog of orders Leading automobile manufacturers operating in Pakistan announced to shut plants and offices during lockdown to prevent their employees from contracting Covid-19 and follow lockdown orders issued by federal and provincial governments. Their employees were not exempted to travel freely from homes to offices as automobiles are not Page 2 Pakistan Automobile Sector considered “essential goods”. Thus closure of plant and dealership network operating nationwide resulted in huge accumulation of orders. After earlier than anticipated revival in economic activity, customers rushed to buy vehicles to avail early delivery along with benefiting from cheap financing rates. However, global congestion on ports (which is still causing supply chain disruption of key raw materials) resulted in lower capacity utilization of existing players, while inadequate capacities of new players and rising demand expanded the order book of the companies. Meanwhile, aggressive nature of buyers helped new players to get massive orders on the first day of launch of vehicles as deep interest was witnessed at the launch of Hyundai Tucson, Changan Alsvin, MG HS and Toyota Yaris. Automobile volumes to remain in spotlight During FY20, automobile industry volumes nosedived by 53% YoY to 112,266 units compared to 241,098 units in FY19. HCAR and INDU volumes dropped by 63% and 57% YoY due to economic slowdown and lower purchasing power parity while PSMC volumes performed better than peers as their sales dropped by 49% YoY. We believe volumes are expected to skyrocket in FY21 and are expected to grow by 81% YoY to 202,776 units with highest growth expected in INDU volumes (by 107% YoY) amid launch of new Toyota Yaris and facelift of Corolla X which will support INDU volumes. We expect industry volumes to grow at 3-yr CAGR of 32%, while INDU, HCAR and PSMC sales volumes are likely to grow at 36%, 33%, and 18%, respectively. Figure: 02 Automobile assemblers volumes and growth PSMC Volumes HCAR Volumes INDU Volumes Industry Growth (RHS) (000 Units) 300 100% 80% 250 60% 200 40% 20% 150 0% 100 -20% -40% 50 -60% - -80% FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY22F FY23F FY21E Source (s): PAMA, Company Financials, AHL Research Concrete pricing power Local automobile manufacturers are largely exposed to currency fluctuation as it forms more than 50% of their raw material cost. We witnessed three dominating automobile companies passing the impact of surge in costs due to higher reliance on imported raw materials. Since Dec’17 to date, INDU and HCAR increased car prices by an average of 55-60% while PSMC increased them by 30-40% due to target market of low-end customers and better localization compared to other players. Despite double-digit decline in demand in FY19, companies did not rush to seize market share as they enjoyed Page 3 Pakistan Automobile Sector a monopoly in their vehicles category (PSMC is a manufacturer of small engine cars, while INDU and HCAR is known for targeting high-end customers). They easily managed to increase car prices without any hesitation as customers had limited choice to buy locally manufactured vehicles due to complex regulatory requirements and massive duties on import of vehicles. However, new entrants are also largely dependent on imported raw materials. Any volatility in currency will result in price increase of vehicles. We expect annual currency depreciation of 4% per annum till FY25 and we believe gross margins of the sector will improve given growth in demand and better pricing power. Prosperity in rural areas will lift automobiles demand Agriculture sector contributes 18.5% to the country’s GDP and provides employment to approximately 40% of national labor force.