Pak Suzuki Motor Co. Ltd Sell Weak Sales Outlook and Profitability Concerns; Sell PSMC PA
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Research Entity Number – REP-085 Pakistan Autos May 8, 2020 Pak Suzuki Motor Co. Ltd Sell Weak sales outlook and profitability concerns; Sell PSMC PA . We resume coverage on PSMC with a Sell stance based on a December Price: PKR161.75 2021 TP of PKR143/sh. We expect a slow recovery of lost sales (post Target Price: PKR143.0 Mehran discontinuation) amid rising competition and a weak financial standing – which leads to a protracted recovery out of losses. Abdul Ghani Mianoor . A number of new entrants will inundate the Economy segment in the [email protected] near term (Kia has already entered), leading to a very competitive +92-21-111-467-000 Ext: 102 landscape for PSMC. This will diminish its pricing power and keep profit margins low – exacerbating its susceptibility to turnover tax. Pak Suzuki Motor Company Limited . PSMC is trading at depressed valuations (P/B 0.6x) vs. peers and its Bloomberg / Reuters PSMC PA/PKSU.KA own historical average (0.8x). We think it requires greater visibility of Mkt Cap (US$mn) 83 profits and a big catalyst for sales (such as Taxi scheme) for it to Upside (%) -11.6 emerge out of low utilization levels and command higher valuations. Fwd D/Y (%) 0.0 Rate as Sell on slow sales recovery and persistent losses Total Return (%) -11.6 We have a Sell stance on Pak Suzuki Motor Co. Ltd (PSMC), based on a 12m Hi-Low (PKR/sh) 310.11/124.21 December 2021 TP of PKR143/sh (DCF based). Our thesis is based on slow recovery of lost sales over CY20-21f, which will keep margins low and likely 6m Avg. D. Vol ('000 shrs) 252.05 maintain losses in the next two years. PSMC’s sales declined by 23% yoy in 6m Avg. Td Val (US$mn) 0.35 CY19 and further 63% yoy in 1QCY20. The expected increase in competition in the Economy segment is a major threat to PSMC (refer Page 2), which had PSMC – Valuation Snapshot previously been the sole assembler of economy cars in Pakistan (after Indus PKRmn CY19A CY20f CY21f CY22f Motors discontinued Cuore in 2016). The discontinuation of Suzuki Mehran is a Sales 116,548 87,800 110,574 128,773 big blow to both sales and margins (consistent annual sales of c.40,000 units), NPAT (2,920) (2,218) (1,635) (312) and the set of recent new models is not strong enough to overcome the loss of EPS (PKR) (35.49) (26.95) (19.86) (3.79) Mehran, in our view. We think PSMC needs a big catalyst for sales such as Taxi DPS (PKR) - - - - scheme to boost sales, but such an event seems improbable in the near term. PBV (x) 0.51 0.56 0.60 0.61 ROE (%) -10.6% -8.9% -7.1% -1.4% Weak financial performance and slow new model launches EV/EBITDA (x) n.m 5.9 2.5 1.9 PSMC has resorted to significant short-term borrowing for working capital since Gross Margin 1.7% 4.5% 6.4% 7.3% Alto’s launch in CY19 (c.PKR32bn), as advances from sales and cash have Net Margin -2.5% -2.5% -1.5% -0.2% dried up. It now has a debt-to-asset ratio of 56% (compared to an average of Source: IMS Research 17% in the previous five years). This is mainly due to the substantial decline in PSMC vs. KSE100 car bookings and concurrent inventory pile-up. Because of a slower-than- expected recovery in auto sales – first due to Covid-19 lockdown conditions and 40% later new competition – we expect PSMC to maintain high leverage on its books. 20% 0% In light of the new competition, PSMC may have to introduce new models or -20% revamp existing ones more frequently than it has in the past – adding burden on -40% cash-flows and undermining its ability to address competition, in our view. -60% Susceptibility to turnover tax to remain high in the next 2 years Jul-19 Oct-19 Apr-20 Jun-19 Jan-20 Mar-20 Feb-20 Besides high leverage, a number of factors will continue to make PSMC prone Aug-19 Sep-19 Nov-19 Dec-19 May-19 May-20 to turnover tax. We expect it to operate at an average capacity utilization of 55% KSE-100 PSMC during CY20-22f (5yr average of 83%), while Opex (as a percentage of sales) Source: IMS Research has risen significantly in recent years (partly due to the new model launches). We think PSMC also finds itself in a conundrum, where price increases (in response to any cost pressures) will protect margins but also hurt sales, which in turn will make turnover tax more probable. Note that there is a high possibility of a reduction in the rate from 1.5% presently in the next Budget, but we think volume growth will remain more crucial for lifting profitability sustainably. Continued on the next page… www.jamapunji.pk Copyright©2020 Intermarket Securities Limited. All rights reserved. The information provided on this document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Intermarket Securities or its affiliates to any registration requirement within such jurisdiction or country. Neither the information, nor any opinion contained in this document constitutes a solicitation or offer by Intermarket Securities or its affiliates to buy or sell any securities or provide any investment advice or service. PSMC The loss of Mehran means more than lower volumes PSMC announced the discontinuation of the Mehran near the end of 2018, with bookings fully closed by April 2019, after a 30yr run. Mehran had the highest localization level in the industry at a whopping 70%. Not only was Mehran the most popular car for PSMC, it was also the cheapest car available in the market (consistent annual sales of c.40,000 units). The discontinuation is also a big blow to the margins and earnings of PSMC, due to the low per unit cost and price of the model. Amid low volumes, the latter factor would have reduced its PSMC Models slate & recent prices susceptibility to incurring turnover tax, in our view. We believe that PSMC needs to launch a model with similar pricing and localization level as the previous Model CC Median Price Mehran to improve its profitability. Gross margins for PSMC fell c.4ppt to 1.7% Swift 1,300 PKR 2.04mn in CY19 from 5.9% in CY18, due to a 19% yoy decline in volumes, which we think is due to the 59% yoy decline in and eventual halt of Mehran sales. Cultus 1,000 PKR 1.80mn Wagon R 1,000 PKR 1.69mn Competition in the Economy segment to hinder sales recovery Bolan 800 PKR 1.10mn The new Alto was launched in June 2019 (previously discontinued in 2016), while the Cultus was launched in 2017. Cultus (rebranded from Celerio) Ravi 800 PKR 1.00mn replaced a predecessor which had the same shape for nearly 15 years. In light New Alto 660 PKR 1.30mn of the new competitive landscape, we believe that PSMC may be required to Source: PSMC, IMS Research introduce new models or revamp existing ones more frequently than it has in the past. The new entrants have so far introduced many new features in their offerings, which will negatively influence consumer perception for PSMC cars, in our view. More recurring capex by PSMC for new models, however, will test an already weak cash-flow position. Kia Lucky Motors (KLM) is the first company to introduce a new model in the Economy segment with the launch of the 1,000cc Kia Picanto (September 2019), which is facing off against the Suzuki Cultus (1,000cc). We understand that the Picanto has been well received due to better build quality (perceived) compared to Cultus. Regal Automobiles launched the Prince Pearl, an 800cc car, at a cheaper price than the Suzuki Alto (660cc). The Prince Pearl is said to have more features and better build than the Alto and, according to channel checks, became fully booked in a short time span (before Covid-19 pandemic). Sazgar-BAIC is also expected to launch affordable cars, with a 1,300cc hatchback in the price range of Cultus. Note that Cultus is c.17% of PSMC’s total car sales. New models which pose a threat to PSMC sales Model Price (Avg) CC Launch date Threat to Kia Picanto PKR 1.9mn 1,000 September 2019 Suzuki Cultus Baic D20 PKR 1.9mn (f) 1,300 Expected 2HCY20 Suzuki Cultus and Swift Prince Pearl PKR 1.05mn 800 February 2020 Suzuki Alto Source: IMS Research We think PSMC may be able to hold on to the majority of its share in the Economy segment in the near term, due to greater brand familiarity among consumers and its countrywide outreach in both urban and rural centers, with over 160 dealerships across the country. What is certain, however, is that consumers will soon have more options to compare with PSMC models. A fragile financial position, as illustrated above, is a key weakness in that scenario, in our view. 2 | PSMC PSMC passenger cars mostly below 1,000cc (Economy) Most new models in close proximity in cc and price range Swift, 4% CC/Price 2.50 Swift, 1300, Cultus, 1000, 2.05 2.00 New Alto, 660, 1.80 Cultus, 17% 1.30 1.50 Bolan , 800, Wagon R, 1.10 1000, 1.69 New Alto, 49% Wagon R, 1.00 13% PKRmn Price 0.50 Ravi, 800, Bolan , 1.00 0.00 Ravi, 7% 10% 0 200 400 600 800 1000 1200 1400 CC Source: PAMA Source: PAMA Utilization Levels expected below 70% without Mehran GPM expected to recover to 6-7% – barely enough to avoid turnover tax 10.0% 9.5% 100% 92% 7.3% 90% 7.5% 87% 6.4% 5.9% 80% 74% 4.5% 70% 5.0% 63% 60% 2.5% 1.7% 56% 50% 47% 40% 0.0% CY17A CY18A CY19A CY20F CY21F CY22F CY17A CY18A CY19A CY20F CY21F CY22F Source: Company Reports & IMS Research Source: Company Reports & IMS Research Debt to Asset ratio to remain elevated PSMC tends to trade below P/B of 1.0x amid sluggish sales periods 60% 56% 56% (x) 54% 50% 50% 2.0 40% 1.5 1.0 0.5 30% 28% Jun-12 Jan-08 Feb-18 Mar-19 Feb-09 Mar-10 Aug-13 Sep-14 Nov-15 Dec-16 May-20 20% May-11 CY18A CY19A CY20F CY21F CY22F Source: Company Reports & IMS Research Source: IMS Research 3 | PSMC I, Abdul Ghani Mianoor, certify that the views expressed in the report reflect my personal views about the subject securities.