United Motors Lanka PLC Equity Research Initiation Coverage
Robust Agency Model tapping consumption growth BUY LKR 144.00 We expect affordability of vehicle ownerships to grow up in tandem with expected per capita LOLC SEC Valuation Share Price LKR 97.80 income rise in Sri Lanka. UML is positioned well to benefit on consumption growth, given its Upside/(Downside) 47.24% strong product portfolio backed by Mitsubishi and the robust agency model over its peers. Risk Level Medium UML's efficient trading model and capabilities in vehicle assembling will also enable it to (refer page 22 for recommendation) respond for frequent market changes while UML can conveniently leverage on its strong balance sheet for further expansions. Share Details
Bloomberg Ticker UML SL CSE Sector Motor Investment Considerations GICS Sector Consumer Discretionary Market Cap (LKR Mn) 9,868 Issued Quantity (Mn) 101 Motor sector to grow with GDP per capita rise and consumption expenditure growth: 30-day avg T/O (LKR Mn) 0.88 We expect motor sector to be one of the fastest growing sectors in the Sri Lankan economy in Beta (6 months) 1.02 short to medium term. Transition through mid-income economy and low vehicle penetration are expected to create a strong demand for motor vehicle purchases. Investment Fundamentals
Mitsubishi continues to be a dominant player: UML is the sole distributor of brand new LKR Bn 12MTrail. 2016(F) 2017(F) 2018(F) Revenue 11.07 14.83 17.95 19.96 Mitsubishi passenger and commercial vehicles and has been able to consistently maintain a Net Profit 1.42 1.62 2.09 2.66 strong market share (>24% of brand new Japanese units imported) during last 9 years S/H's Equity 10.44 11.41 12.66 13.99 despite of competition from other brands. Mitsubishi is one of the oldest and leading global Total Assets 13.15 14.90 16.81 18.62 automotive player and is familiar, trusted name amongst Sri Lankans, giving a competitive ROA (%) 12 11 12 14 advantage for UML to stand above the competition. ROE (%) 15 14 17 19
Strong agency model to attract strategic brands to country: Apart from the strategic Price Multiples connection with Mitsubishi, UML has been able to timely introduce strategic brands such as PE (X) 6.95 Perodua, DFSK, JMC and TVS to capture a notable market share by utilising its cost effective PBV (X) 0.95 Price to Sales (X) 0.89 and efficient agency model. Divdend Yield (%) 6.13
Diverse product portfolio with wider brand spread: UML has the most diversified product Price Behavior and brand portfolio over its sector peers which enables it to mitigate risk on dependence on 120 115
one product from external fiscal shocks. LKR 110 105 100 Strength in value chain: UML has strengthened its presence in motor sector value chain 95 90 through vehicle assembly operation, reputed after-sales service operation and related 85 80 diversification into products such as lubricant oil and tyres. 75 01-Oct-14 01-Jan-15 01-Apr-15 01-Jul-15 01-Oct-15 UML Share Price ASI movement (adjusted to UML base price) Strong balance sheet to provide convenient funding options: UML has consistently Per Share Details as at 30.06.2015 (LKR) maintained near zero long-term debt position over the last 5 years and hence can Earnings per share (trailing 12m) 14.08 conveniently leverage up for prospective investment opportunities. Net Asset Value per share 106.53 Sales per share (trailing 12m) 109.75 Valuation Dividend Per Share (trailing 12m) 6.00 Business Nature United Motors Lanka PLC is a licensed importer and We assume a cost of equity of 15% for our valuation which is a 7% premium on 3 year distributor of motor vehicles. It markets a range of treasury bond rate(GOSL), taking into consideration the equity market risk and industry automotive products, from top-end luxury vehicles to three- volatilities. Accordingly, We have valued the counter using FCFE model and derived the value wheelers and motor bikes, and from car parts to lubricants of a share at LKR 144.00. At the current value, counter is trading at a discount to our and tires. valuation. We give a Buy recommendation for UML. Shareholder Details Yaseen M A 61% Salient Sections of the Report Yaseen R R 11% Chrysostom S M 7% Motor sector to rise up with increase in per capita income (pg.2)|Mitsubishi continues to be a Shareholders below 5% 21% Source:CSE, Bloomberg, LOSEC Research dominant player (pg.4)|Strong agency model to attract strategic brands (pg.5)|Diversified product portfolio (pg.8)| Strength in value chain (pg.9)|Strong balance sheet (pg.10)| Flexible Analyst (s) on changes in macro-economic variables (pg.11)| Valuation (pg.12)|Sensitivity (pg.13)| Gayan Rajakaruna Earnings risk comment (pg.13)|Appendices (pg.14 ) +94 117 880837 [email protected] 01 October 15 Recommendation Guidance, Important Disclosures and Analyst Certification: Page 22 Initiation Coverage: United Motors Lanka PLC | 01 October 15
Motor sector to rise up with increase in per capita income and consumption expenditure growth
Total vehicle population of the country has climbed up to 5.6 million in 2014 while posting a strong correlation between growth of vehicle population and per capita income over the last ten years. Accordingly, we expect Sri Lankan economy to show a strong growth in the future despite of the short term volatility, and vehicle population to hit 7.5 million by end of 2017. Total vehicle population will hit 7.5mn by 2017 By end of 2014, new vehicle registrations increased by 31.5% YoY while 1H2015 registrations posted a 90% YoY growth adding a 314,155 vehicles to the country. Despite certain historic vehicle volume dips largely due to import duty changes, the records indicate that the new vehicle registrations have posted a 13% CAGR during the last decade, qualifying to form a positive correlation with per capita income rise over the same period.
Graph 1: Correlation of GDP per capita and vehicle population Graph 2: Correlation of GDP per capita and vehicle registration
Consumer Discretionary 8 5500 600 5500
5000 USD
7 USD 5000 500 Millions 6 4500 4500
4000 Thousands 5 400 4000 3500 3500 4 300 3000 3000 3 2500 200 2500 2 2000 2000 100 1 1500 1500 0 1000 0 1000
Vehicle Population GDP Per Capita Income(USD) New Vehicles Registration GDP Per Capita Income(USD) Source: Dept. of Motor Trafic, LOSEC estimates Source: Dept. of Motor Trafic, LOSEC estimates
Sri Lanka’s private consumption expenditure has also expanded over the last five years while posting a 15% CAGR by 2014 with consequent to rise in per capita income. Transport expenditure accounts for over 20% of annual consumption expenditure in Sri Lanka since 2008 and has become the second largest category after spending on food Sri Lankans will spend and beverage. more on vehicle purchases Being a key component of total consumption expenditure, transport expenditure over the last five years demonstrate a strong correlation with rising per capita income signaling that the expenditure on transport is likely to increase proportionately with the anticipated increase in per capita income thus resulting an increase in demand for motor vehicles. Therefore growth in the private consumption will bode well for the increase in demand of passenger vehicles, motor cycles and three wheelers offered by UML in years ahead.
Graph 3: Correlation of GDP growth and consumption exp. Graph 4: Transport expenditure increasing over last 5 years LKR Bn LKR 11,000 8.5% 7,000 500,000 10,000 LKR Bn LKR 8.0% 9,000 6,000 400,000 8,000 7.5% 5,000 7,000 300,000 6,000 7.0% 4,000 5,000 6.5% 3,000 200,000 4,000 3,000 6.0% 2,000 100,000 2,000 5.5% 1,000 1,000 0 0 0 5.0% 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014 GDP Ttl. Pvt. consumption expenditure GDP growth rate Transport Ttl. Pvt. consumption exp. excl. transport GDP per capita Source: CBSL, LOSEC estimates Source: CBSL, LOSEC estimates
Table 01: Correlation of different variables
Source:CSE, Bloomberg, LOSEC Research Variable Cofficient of Correlation Correlation GDP per capita and vehicle population 0.99 Strong positive GDP per capita and new vehicle registration 0.68 Positive GDP per capita and transport expenditure 0.98 Strong positive Total private consumption and transport expenditure 0.99 Strong positive
2 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Low motor vehicle penetration and vehicle density
Apart from the macro economic outlook, Sri Lanka's vehicle penetration (vehicles per 1000 people) and vehicle density (vehicles per one kilometre) are relatively low compared to regional peers. Therefore, we believe that the sector has a potential to grow along with the targeted per capita growth and the extension of road network.
Graph 5: Motor Vehicles per 1000 people** Graph 6: Vehicles per 1 km
Vehicles Vehicles 400 250 350 200 300 250 150 200 100 150 100 50 50 0 0
Source: Worldbank Source: Worldbank ** Motor vehicles include automobiles, SUVs, trucks, vans, buses, commercial vehicles and freight motor road vehicles but do not include two/three-wheelers. Population Source: Dept. of Motor Trafic, LOSEC estimates refers to midyear population in the respective year.
Source: CBSL, LOSEC estimates
2 | LOLC Securities Limited 3 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Mitsubishi continues to be a dominant player in Sri Lankan motor sector
UML is the sole distributor of Mitsubishi passenger and commercial vehicles in Sri Lanka and holds a 28% market share of the total Japanese brand new vehicle imports by FY14/15 while controlling 9% of the total vehicle market. UML will leverage on Mitsubishi Motor Company (MMC) of Japan has consistently maintained its position as a leading automotive brand in Mitsubishi brand the world for its products’ quality, performance and price affordability enabling UML to leverage the popularity of Mitsubishi brand in the local market. Further, with the exclusive distribution right of brand new Mitsubishi vehicles, UML would face less competition in brand new Mitsubishi vehicle segment.
UML has been able to consistently manage its market share of Japanese brand new vehicles over 24% since 2006 Mitsubishi vehicle and except in 2011 signalling its strong presence in the local vehicle market. Considering the average historical market spare part sales account share combined with the planned investments on brand building and marketing initiatives, workshop and facility for 69% of Group's upgrading and new product launching, we estimate that UML to maintain minimum 27% market share in the next topline three years.
Graph 7: UML will maintain minimum 27% market share of Mitsubishi
8000 45% 7000 40% Mitsubishi share 6000 35% 5000 30% 4000 Brand new Japanese
Units 25% 3000 units imported(excl. Mitsubishi) 2000 20% Market share% 1000 15% 0 10% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(F)2016(F)2017(F)
Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates UML has been tapping high end luxury vehicle segment through its flagship SUV “Mitsubishi Montero” since 1998. Montero attracts high income people who seek a luxury vehicle with a strong brand name which goes along with their standard of life and has now become a trusted name amongst high end business community and professionals. Affluent Sri Lankans prefer to use brand such as “Montero” or “Prado (by Toyota)” to express their status quo. This Mitsubishi Montero is a social perception has created a strong leverage for UML to position itself in the high end vehicle segment over its household name in Sri competitors. Lanka to represent the Proving the success story of Montero, UML has been able to sell approximately 4,777 SUVs registering above 15% status quo of wealthy share over last 4 years. However, SUV sales in FY14/15 had a decline largely due to tapering off the vehicle permit people schemes which was granted for state employees to import brand new vehicles and the absence of a hybrid vehicle in its product portfolio to leverage on the booming hybrid vehicle market conditions arising out of lower import duties of this category. However this downside impact has been negate to a certain extent via increased demand for “Mitsubishi Outlander” due to its technical sophistication and reduced pricing compared with Montero.
Graph 8: Mitsubishi SUV will continue to be a dominant product with strong market share Graph 9: FY15/16 looks positive for Mitsubishi SUVs Units Units 5000 50% 240 1000% 4500 45% 220 SUV registrations has improved between 2014 900% 200 4000 40% and 2015 MoM 800% 180 3500 35% 160 700% 3000 30% 140 600% 2500 25% 120 500% 2000 20% 100 400% 80 300% 1500 15% 60 1000 10% 40 200% 500 5% 20 100% 0 0% 0 0% 2010/11 2011/12 2012/13 2013/14 2014/15 Jan Feb Mar Apr May Jun Jul Aug Mitsubishi SUVs SUVs excl Mitsubishi Mitsubishi share 2014 2015 MoM Growth Source: Annual Report,Dept. of Motor Trafic Source: Annual Report,Dept. of Motor Trafic
We believe that the SUV sales will be rebounded to average sales volumes during FY15/16 with the introduction of PHEV will outperform as “Mitsubishi Outlander Plug-in Hybrid Electric Vehicle (PHEV) during the latter part of the last year. With growing Mitsubishi being the first demand for fully and hybrid electric vehicles due to its fuel efficiency, PHEV is expected to be the next growth product to introduce this of luxury vehicle segment. However, the growth prospect of PHEV could be faltered in the present context due to lack technology to SUVs of island-wide coverage of electric charging posts, excessive demand for the existing charging points in Colombo and limited mileage capacity associated with electricity based driving. 3 | LOLC Securities Limited 4 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strong agency model to attract strategic brands to country
UML was able to secure Mitsubishi dealership during its early days which led the company to create an edge over competition as a trading business. The connection which has been built with Mitsubishi over the years has now enabled UML to have a cost effective and efficient trading model which will place UML ahead amongst other vehicle Strong agency model that importers. Further, while maintaining close ties with Mitsubishi UML has also shown its capability in bringing other exists within UML makes strategic brands such as Perodua, DFSK, JMC, TVS and MG to the country in a timely manner and capturing the market it difficult for competitors share within a short span of time. to penetrate into Historically, the management of UML has been capable of introducing right brands/ products to the local market in a timely manner in order to strategically respond to challenges stemming from ever changing import duties and other macro-economic variables (interest rates, exchange rates, fuel prices). We believe that given its strong relationships with principles, UML will continue to follow the same strategy by keeping the right vehicles ready to be marketed upon changes taking place in import duty structure.
Graph 10: UML has been able to make strategic decisions to gain on growth phases of the economic cycle and secure on motor sector challenges
600,000 Reduced taxed on Reduced taxes on small No excise duty Reduced taxes and fast hybrid vehicles and cars, reduced fuel prices levied by Gvt. on economic growth leading to electric vehicles and increased per capita 500,000 assembled vehicles rapid expansion in motor income leading to a growth making them half sector in vehicle registrations of the price of motor cars, motor cycles imported ones
400,000 vehicle registrations vehicle
New 300,000
Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates 200,000
100,000
- 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-Aug
- Introduction of local - Added new Mitsubishi Montero to capitalize assembly facility to capture increasing demand from permit holders - Added Mitsubishi PHEV to increased demand of SUVs - Introduction of seize tax benefits on hybrid by permit holders Mitsubishi Outlander and - Introduction to DFSK mini truck to gain on tax vehicles increased supply of advantage - Launching TVS King three Perodua Viva to gain - Introduction of Perodua Axia wheelers from reduced taxes (35% - Launching TVS Vego scooters to respond to growing due to increased demand on reduction in cost of demand of motor cycles small vehicles emerged due to passenger vehicles) tax reduction in interim budget - Commencing assembly of vehicles with Chinese 2015 origin
Source: Annual Reports
Success story of Perodua reflects UML's strong agency model
UML was able to recognize Malaysian brand Perodua as a good and affordable product for small car market and introduced its first Malaysian product to local market in 1997. With the introduction of 'Perodua Viva' in 2008, the company achieved a remarkable success in this segment during last five years while transforming the relatively unknown Malaysian brand to a well-known more demanding car product in the local market. UML was successful in reaping the tax advantage emerged in 2010 and sold over 4400 Perodua cars in 2011 while capturing a significant market share of the same. Due to its availability and marketability backed with strong after sales services, Perodua Viva sales were very impressive in previous years despite significant increase in taxes in 2012, till the manufacturer Source: Annual Report,Dept. of Motor Trafic decided to halt the production of the car in 2H2014.
Perodua Viva had a significant downfall in 1H2015 since UML was unable to timely capitalize the tax reduction in Perodua Axia is now small cars due to the manufacturer's delay in supplying a successor to 'Perodua Viva'. However UML has now ready with advanced managed to offer 'Perodua Axia' for the small car market (<1000cc) which has seen a significant growth potential features and competitive under low tax environment. 150 Perodua Axia cars have been registered for the last two months and we estimate a prices for the next sprint moderate sales volume of 500 units in FY16 and 1000, 1100 units respectively in FY17 and FY18 and anticipate a drop in volumes due to probable import duty changes in this category in coming years. 4 | LOLC Securities Limited 5 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strong agency model to attract strategic brands to country (cont…)
Graph 11: Perodua Viva/Axia demand growth Graph 12: UML expects a growth in DFSK market share Units Units 5,000 200% 26000 12% 24000 4,500 150% 22000 10% 4,000 20000 3,500 100% 18000 8% 3,000 16000 14000 2,500 50% 6% 12000 2,000 0% 10000 1,500 8000 4% 1,000 6000 -50% 2% 500 4000 1517 1176 1300 1430 1573 2000 300 860 807 - -100% 0 0% 2011 2012 2013 2014 2015-Aug 2016(F) 2017(F) 2018(F) DFSK Mini truck New registration of 'single cabs' category*** Perodua Viva/Axia sales (units) YoY Growth Market share Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
High performer amidst market disruptions - DFSK Unimo Lokka
Another strategic brand 'DFSK Unimo Lokka', a small commercial truck specifically developed for Sri Lankan terrain was introduced to the market in 2011. Despite a disproportionate tax structure made available to DFSK in 2H2013 and also being a new and unknown brand competing against established ones, Unimo Lokka has been able to capture 10% of the small truck market within just 20 months of its market entry. DFSK plans to capture 10% market share in DFSK sales volume saw a dip in 2014 after increase in duty. However with reinvestments in brand building and single cab category emphasize on its specific value proposition, approx. 807 units have been sold in Jan-Aug 2015 providing a good indication about its marketability in the local market. In last six months, it has sold about 110 monthly average of DFSK trucks while a consistent market share has also been maintained over last 4 years. With these impressive track records fueled by strong after sale services along with continuous introduction of new models to its portfolio, we estimate around 1300 units to be sold in FY16 with 10% YoY growth for following two years while ongoing tax issue also taking into consideration.
(***single cab category includes mini trucks and cab shaped vehicles)
MG Brand, a new segment
UML launched Morris Garages (MG) in 2014 as a luxury sport car model and introduced the automatic version of it in UML's relationship with 2015 to fill the gap of this segment. While UML looks forward to expand the product portfolio into larger sedan SAIC category through MG model despite the product being in the early stage of the life cycle, UML has an agency relationship with a large player such as SAIC Motor Corporation, one of the big four Chinese automakers who has introduced MG to UML.
UML to leverage on cost efficient trading model
Higher GP and Operating UML has been able to consistently maintain gross and operating margins above the peers indicating its ability to margins efficiently manage the cost side of the business. Graph 13: UML has better gross profit margins over peers Graph 14: UML's operating margins are above the peers % % 40 18 35 16 14 30 12 25 10 20 8 15 6 4 10 2 5 - 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 UML DIMO COLO ASHO SMOT AUTO UML DIMO ASHO SMOT AUTO
Source: Bloomberg Source: Bloomberg 5 | LOLC Securities Limited 6 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strong agency model to attract strategic brands to country (cont…)
TVS, the growth star
UML is trading motor cycles and three wheelers along with spare parts through TVS Lanka, a joint venture between United Motors, T.V. Sundaram Iyengar & Sons and TVS Motors of India with a 50% stake owned by UML. Starting business in 2003, the company has been able to position itself well in a competitive market while capturing a significant market share in both segments during last 5 years. The company strategy seems to be aligned well with TVS has done volumes… per capita income growth witnessed in the country which led to emerge a high income middle class with a strong ……...but experiences purchasing power of buying cycles and three wheelers. thinner margins Despite of experiencing volume dips in 2012, TVS has been able to consistently maintain its market share in two wheeler segment above 10% while seeing a consistent growth of the market share in three wheeler segment in the past. Despite having low net profit margins relative to the high top line of the company due to thinner gross margin from each unit of sale, management seems to be continuously working on improving volumes via major promotions along with a strong focus on sales and after sales channel development. Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Graph 15: Market share of TVS motor cycles above 10% Graph 16: Market share of TVS 3-wheelers growing Units Market share Units Market share 260,000 16% 160,000 8% 240,000 220,000 14% 140,000 7% 200,000 12% 120,000 6% 180,000 160,000 10% 100,000 5% 140,000 80,000 4% 120,000 8% 100,000 6% 60,000 3% 80,000 4% 40,000 2% 60,000 35,466 32,000 25,000 21,839 24,523 25,600 20,480 10,381 40,000 15,840 18,000 2% 20,000 3,656 2,761 4,028 5,320 7,000 6,650 6,318 1% 20,000 - 0% - 0%
New motor cycle registrations TVS motor cycle sales Market share New 3-wheeler registrations TVS 3-wheeler sales Market share
Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
Considering last 6 months' TVS motor cycle registrations, we estimate about 32,000 units to be sold for FY16 with 20% YoY volume decline subsequently due to possible changes in duty structure along with shifting peoples' buying sentiment from 'two wheel drive' to a small car in par with expected increase in spending. However we believe TVS motor cycles to increase its market share from 10% to 13% in future years due to product quality and aggressive branding strategies. Shorter churning period 3-wheeler market has seen a rapid growth in early 2000 and saw a growth decline in 2012-2014 due to market (approx. 6 years) of 3- saturation combined with unfavorable import duties. However, we expect a moderate market growth in the coming wheelers will augur well years considering increasing usage and relatively shorter churning period of commercial 3-wheelers. Accordingly, we with market growth would estimate a moderate figure of 7000 units for FY16 taking last 6 months' registrations in to account. Our prospects estimate will entail a 10% YoY decline on following years due to possible import duty changes.
UML carries TVS in its book at LKR 632 million. We expect TVS to continue with the growth momentum supported by We estimate TVS to the increase in per capita income and to generate a return with an average of 10% ROE for next three years. However generate an average 10% we believe that TVS is capable of improving its net profit margins over the time by reducing the burden on heavy ROE promotional expenses due to being the early stage of business cycle and improving distribution channels enabling to cut down related operational expenses. Graph 17: Financial forecast of TVS Lanka LKR Mn 10,000 12% 11% 8,000 10% 9% 8% 6,000 7% 6% 4,000 5% 4% 3% 2,000 2% 11 44 124 159 149 140 1% - 0% 2013 2014 2015 2016(F) 2017(F) 2018(F) Revenue PAT Net profit margin ROE Source: Annual Reports, LOSEC estimates 6 | LOLC Securities Limited 7 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Diverse product portfolio with wider brand spread
Diagram 1: UML’s Product Offering UML markets a range of automotive products, from top-end luxury vehicles to three-wheelers and
Lancer Ex MG motorbikes, and from car parts to lubricants and Mirage Attrage Axia tires, thus has consistently developed its portfolio
to serve the widest possible market base across Sri
Delica D5 DFSK 27 Brilliance H1 Brilliance H2L Lanka.
UML’s diverse vehicle portfolio currently offers Montero Montero Sport Outlander ASX Phev cars, SUVs, dual purpose vehicles, trucks, busses, motor cycles and three-wheelers in order to L 200 - Single Cab Sportero N300 Double Cab L 200 - Double Cab N300 Single Cab (4WD/2WD) address varying customer needs of the market. (4WD/2WD) (2WD) (2WD/4WD)
When compared with sector peers, UML stays well
Unimo Lokka ahead with the diversity and quality of their product offering which is always backed by the diversity of Mitsubishi Motors Japan. Therefore the
Fuso Light Duty Fuso Medium Duty Fuso Heavy Duty Fuso Medium Duty Fuso Heavy Duty company has been able to maintain a strong (Canter Trucks) (Canter Trucks) (Canter Trucks) foothold amongst Sri Lankans who opt to consider
the name 'United Motors' for a purchase of brand JMC Crew Cab JMC Cargo Truck new commercial or personal vehicle. JMC Full Body JMC Freezer Truck
We believe that the product diversity will enable Fuso Bus UML to off set losses which could be incurred on
the respective products due to unexpected fiscal policy changes such as import duty rates. Metro 100cc Metro Plus Phoenix 125 Apache RTR 150 Apache RTR 180
Further, we believe that UML will continue to focus on introducing different vehicle categories/models Jupiter XL Super Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Scooty Pep+ Scooty Streak Wego such as mid-range passenger cars with auto- Scooty Zest Heavy Duty
transmission, commercial and special purpose
vehicles and much discussed electric vehicles in
years to come. King GS King FLD King FB King MAX
Source: UML website
Diagram 2: UML has wider product offering over sector peers CARS VANS SUVs CABS MINI TRUCKS BUSSES MOTOR THREE AGRICUL DEFENCE TRUCKS CYCLES WHEELERS TURAL AND SPECIAL
UML Diverse product portfolio
enables UML to offset possible losses stemming DIMO from unfavorable import duty changes
SMOT
ASHO
COLO
Source: Annual Reports Apart from the pivotal role played by “Mitsubishi” in UML's brand portfolio, the company has become a home to 12 Leading brands make other world leading brands pertaining to motor vehicles, two wheelers and three wheelers, car care products, UML to become closer to lubricants and tyres. This brand composition over its peers will benefit the company from greater consumer customers preference towards wider array of established brands.
Source: Annual Reports, LOSEC estimates 7 | LOLC Securities Limited 8 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strength in value chain
Wide customer reach to drive the business
UML has been able to consistently maintain a strong after sales service for their customers through its widely distributed branch, showroom and dealer network which enables UML a wider reach to its existing and potential Relatively large number customers. With its aggressive investment approach in upgrading and expanding workshops and showrooms, UML's of workshops, branches customer reach appears widely spread than most of its peers. and dealers Spare parts & after sales services being the second highest contributor to the total revenue while retaining 10% CAGR over last 7 years, we expect this segment to generate revenue with 15% YoY growth due to expected increase in sales volumes along with capacity improvement of branches and workshops. We believe the investment in Rathmalana property to set up a logistic hub and a large workshop will augur well with growing demand for after sales and spare part services.
Graph 18: After sales services to contribute 15-20% of Table 02: Better operational capability over peers topline LKR Mn 22,000 25% Counter Workshops Branches/S Dealers/Distributors/ 20,000 20% 18,000 /Service howrooms customer contact 16,000 15% centers points/display points 14,000 10% 12,000 5% UML 7 13 >2000 10,000 0% DIMO 10 32 25 8,000 6,000 -5% SMOT 3 4 125 4,000 ASHO 17 10 - 2,000 -10% COLO 1 1 - - -15% - 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 AUTO 2 1 (E) (F) (F) Spare parts, repairs and services Ttl. rev excl. spare parts, repairs and services % contribution to ttl.rev YoY growth
Source: Annual Reports, Company web sites Source: Annual Reports, LOSEC estimates
Vehicle assembling, a catalyst of changing the industry
Being the one of few companies with a vehicle assembling licence, UML seems to have a significant strength in assembling vehicles and marketing them through its efficient inbound and outbound dealership model. UML's fully Vehicle assembling owned subsidiary Unimo Enterprises (UEL) is now well equipped with expertise, agreements of new principals in licence and close ties with place and enhanced operational capacity in order to assemble vehicles at double the capacity in coming years. Thus Chinese manufactures we believe, UML can launch several assembled 'passenger vehicle products' in FY16 with the aim of having a fine will provide UML a balance between import and assembly of different classes of vehicles in future years. We estimate these assembled competitive edge ones to capture a reasonable sales volume in next 3 years due to the attractive pricing compared with the imported ones along with the efficient marketing and distribution model inherited with UML.
Related diversification to strengthen the value chain
With the objective of leveraging on the customer value proposition, UML has been operating in lubricant (Valvoline Diversification to and MAK) and tyre (Yokohama) businesses while making a fair contribution to the Group's topline. UML has been the lubricant oil and tyre only company amongst sector peers (excluding Autodrome) which offers lubricant products to customers and has businesses been able to capture a fair degree of market share.
Graph 19: Revenue composition of lubricant and tyre products Table 03: UML's lubricants market share has improved LKR Mn 700 10% Product 2014 2013 600 Sales qty (KL) Mkt share Sales qty (KL) Mkt share 500 Valvoline 1,077 1.98% 785 1.46% 400 (UML) 5% 300 MAK 2,241 4.13% 1,760 3.28% 200 (UML) Motul 46 0.08% 46 0.09% 100 (AUTO) 0 0% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Caltex/ 26,753 49.30% 28,241 52.58% (E) (F) (F) Chevron Lubricants and car care products Tyres % contribution of lubricant to ttl. rev % contribution of tyre to ttl.rev Servo 6,833 12.59% 6,738 12.55% (IOC) Source: Annual Reports, LOSEC estimates Source: Lubricant market report by PUC, Sri Lanka 8 | LOLC Securities Limited 9 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strong balance sheet to provide convenient funding options
UML has been able to generate strong free cash flow balances and gearing has continued to be at near zero level Near zero gearing and which will open up further avenues for raising debt to venture into new projects. Its cash balance (combined with strong cash position to cash in hand and short-term investments) over last few years is well above most of the peers, while reaching allow for investments approximately LKR 1.36 billion by the end of June 2015. Thus UML has appeared to be a self-financed business during previous years in relation to its local peers.
Graph 20: Increase in cash position and low gearing of UML Graph 21: UML could leverage on low gearing
20,000 8% 20% 19% 18,000 7% 16,000 6% 14,000 15% 12,000 5% 13% 10,000 4% 8,000 3% 10% 6,000 2% 7% 4,000 6% 2,000 1% 5% 0 0% LKR Mn 2% 2010 2011 2012 2013 2014 2015 2016E 2017F 2018F 1% 0%0%0% 0%0%0% 0% 0%0% 0%0%0% Total equity Cash and cash equivalents 0% UML DIMO ASHO COLO SMOT AUTO Total assets(LSH) Gearing (RHS) 2013 2014 2015 Source: Annual reports, Bloomberg Source: Annual reports, Bloomberg
Graph 22: UML has a strong cash position and asset base over peers
1,600 20,000 1,400 1,200 15,000
Source: Annual Reports, LOSEC estimates 1,000 800 10,000 600 400 5,000 200 0 - LKR Mn LKR Mn UML DIMO ASHO COLO SMOT AUTO Cash and cash equivalents Total assets
Source: Annual reports, Bloomberg
Strong dividend pay-outs strengthening investor confidence
UML has managed to consistently maintain a dividend payout above 25%, recording it above the peers in the last 4 UML pays fat dividends to years. UML has produced a steadily raising dividend payout along with strong dividend yield exceeding 6.5% investors indicating stability and financial strength of the business. Company's div. yield is currently at a premium to the sector div. yield of 3.28% and we estimate that the company would have an even better div. yield in coming years to create value to its investors. Thus we estimate UML's dividend payout ratio to remain minimum at 40% while div. yield to reach over 8% by FY18. Graph 23: Higher dividend payout than peers Graph 24: Above the average dividend yeild
65% 9 12% 60% 8 55% 10% 50% 7 45% 40% 6 8% 35% 5 30% 6% 25% 4 20% 3 4% 15% 10% 2 2% 5% 1 0% 2010 2011 2012 2013 2014 2015 0 0% LKR UML DIMO COLO ASHO 2010 2011 2012 2013 2014 2015 SMOT AUTO Dividend per share Dividend yield
Source: Lubricant market report by PUC, Sri Lanka Source: Bloomberg Source: Bloomberg 9 | LOLC Securities Limited 10 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Flexible on changes in macro economic variables
Confronting FOREX risk as experienced industry player
UML appears to be exposed to considerable forex risk since its product portfolio is mainly consisting of vehicles with Imported vehicle prices Japanese, Chinese and Malaysian origin. From latter part of 2014, LKR has depreciated over Yen and Dollars making to rise up with rupee Japanese vehicles relatively expensive than before. Specially with CBSL allowing Rupee to be freely floated since early devaluation, impacting September 2015, Rupee saw a significant value depreciation against USD which will essentially lead prices of UML earnings imported vehicles and spare parts to go up in the near future. As a result, although UML is mostly likely to pass this additional cost to the customers to maintain its target margins, company will find difficult to achieve anticipated sales volume due to lowering demand on increased vehicle prices.
Depreciation of CNY and However, Chinese currency devaluation in August in this year along with depreciation of Malaysian Ringgit will make MYR to offset Rupee vehicle and spare part imports from these countries relatively cheaper than before. But UML continues to remain devaluation unhedged against currency fluctuations creating considerable risk despite diverse portfolio.
Graph 25: LKR depreciating against USD and JPY making Graph 26: Yuan and Ringgit depreciating against USD imports expensive making Chinese and Malaysian imports cheaper LKR LKR CNY MYR 140 1.60 6.45 4.50 138 1.50 6.40 4.30 136 4.10 Source: Annual reports, Bloomberg 1.40 6.35 134 6.30 3.90 1.30 3.70 132 6.25 3.50 130 1.20 6.20 128 3.30 1.10 6.15 126 3.10 6.10 2.90 124 1.00 6.05 2.70 122 0.90
6.00 2.50
1/1/2014 2/1/2014 3/1/2014 4/1/2014 5/1/2014 6/1/2014 7/1/2014 8/1/2014 9/1/2014 1/1/2015 2/1/2015 3/1/2015 4/1/2015 5/1/2015 6/1/2015 7/1/2015 8/1/2015 9/1/2015
11/1/2014 12/1/2014 USD-LKR 10/1/2014 JPY-LKR USD-CNY USD-MYR Source: Bloomberg Source: Bloomberg
UML to leverage on low interest rate environment
Steady decline in interest rates backed by policy interest rate cuts and significant liquidity in the money market has enhanced the affordability of vehicles including UML products in recent years. Therefore if interest rates continue to Source: Annual reports, Bloomberg remain low, people will continue to have cheaper financial products such as vehicle leases, loans and hire purchases while benefiting UML in coming years. Vehicle loans and leasing to be cheaper under low CBSL has also indicated on keeping the interest rates low despite of Rupee devaluation, however we presume that the interest rates currency devaluation is likely to create an upward pressure on interest rates in the near future. Adding fuel to the fire was CBSL's directive to commercial and licensed specialized banks to reduce Loan to Value (LTV) to 70% in order to discourage vehicle purchases on leases and thereby controlling vehicle import volumes and thus curtailing BoP deficit. The directive is likely to hit the motor sector growth prospects in the future and therefore we have followed a modest approach in estimating sales volumes of economic passenger vehicles and commercial vehicles.
Graph 27: UML will benefit on declining lending rates
16 % 15 AWPLR declines and 14 stabilizing at 6-7% 13 12 11 10 9 8 7 6 5 4 1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013 7/1/2013 1/1/2014 7/1/2014 1/1/2015 7/1/2015 12M T-Bill rate Weekly AWPLR Source: Bloomberg 10 | LOLC Securities Limited 11 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Valuation
We have used the Free Cash Flow to Equity (FCFE) model in deriving the valuation for UML. Accordingly we estimate total valuation for the company at LKR 14.52 billion. We assume a cost of equity of 15% which is 7% premium to 3 year Sri Lanka Govt Treasury Bond Yield. A risk premium of 7% has been taken considering the equity market risk in CSE as well as sector volatilities. We have taken a mid-term growth (3-6 years) of 5% considering the expected GDP growth of the country and a free cash flow terminal growth (>6 years) of 3%. Accordingly, we value the share at LKR 144 which is a 47% discount to the current price of the share. At the current share price, UML is trading at forward PE of 6.95X and a forward PBV of 0.95X.
Sensitivity of valuation for Terminal Growth and Cost of Equity is indicated below and sensitivity of key assumptions are evaluated separately in proceeding section.
Table 04: Valuation Sensitivity Matrix
Cost of Equity Share price in LKR 13% 14% 15% 16% 17% 1% 158.20 144.40 130.80 122.60 113.80 2% 167.70 152.10 136.90 127.90 118.20 3% 179.10 161.20 144.00 133.90 123.20
Rate
Growth Growth 4% 193.00 172.20 152.40 141.00 129.00 Terminal 5% 210.50 185.50 162.40 149.30 135.80
Source:CSE, Bloomberg, LOSEC estimates
Table 05: Peer Comparison
Name Market Cap (USD Mn) PE (x) PBV (X) Dividend ROE % Yield % United Motors Lanka Plc (Sri Lanka) 70 6.94 0.92 4.09 14.91 Diesel & Motor Engineering (Sri Lanka) 44 7.82 0.67 2.90 9.26 Colonial Motors Plc (Sri Lanka) 13 6.70 0.48 4.96 7.50 Sathosa Motors Plc (Sri Lanka) 13 6.29 1.40 2.34 24.73 Lanka Ashok Leyland Plc (Sri Lanka) 38 16.28 1.97 2.68 12.82 Sunfonda Group Holdings Ltd (China) 197 6.51 0.79 2.48 13.22 Berjaya Auto Bhd (Malaysia) 494 10.19 4.59 5.09 51.96 Baoxin Auto Group Ltd (China) 1089 12.30 1.28 1.52 10.89
Source:CSE, Bloomberg, LOSEC Research
11 | LOLC Securities Limited 12| LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Summarized Sensitivity of Assumptions
Graph 28: GDP growth sensitivity: High Graph 29: Currency sensitivity: Medium LKR LKR 160 147 155 146 150 8% 145 1.5% 145 140 -8% 144 135 143 -1.5% 130 125 142 120 141 115 140 110 105 139 100 138 -1% 0 1% -1% 0 1% Change of GDP growth forecast USD:LKR forecast
Source:LOSEC Research Source:LOSEC Research
Graph 30: Tax rate: Medium Graph 31: Interest rate sensitivity: Medium LKR LKR 148 148 147 147 146 2% 146 2% 145 145 144 144 -2% 143 143 -2% 142 142 141 141 140 140 139 139 138 138 -1% 0 1% -1% 0% 1% Change of tax rate forecast Interest rate forecast
Source:LOSEC Research Source:LOSEC Research Earnings Risk Comment
UML’s valuation is dependent on the overall economic growth of the country and resulted increase in demand for motor vehicles. Thus any broader economic slowdown leading to decline in GDP growth and GDP per capita income, interest rate rises and rupee depreciation will dampen the expected value of UML.
Our investment case is evolved around the presumption of fast economic growth of the Island nation and resultant increased consumption. But change of economic outlook to a stagnant environment can lead to people opt for basic Source:CSE, Bloomberg, LOSEC Research transportation rather than owning personal vehicles. Furthermore, change in lifestyles such as improved public transport facilities can curtail demand for new vehicle imports.
In the short term, motor sector is highly sensitive to frequent vehicle import duty changes. Govt takes import duty as an instrument to control the vehicle imports and thereby controlling the impact on the balance of payment. However, we believe that UML is now well experienced and shaped in tackling these cyclical import duty changes and we believe that the company is equipped and capable of rapidly introducing suitable vehicles which can exploit price benefits emerging from continuous structural changes of import duties.
UML is heavily dependent on Mitsubishi brand due to its reputation in the local market while Mitsubishi vehicles and spare parts account nearly 70% of UML's topline. Mitsubishi corporation is in existence in the global automotive industry over a century and has built up its fame as a quality, reliable and affordable vehicle manufacturer. Therefore in a scenario where the Mitsubishi Corporation to face a crisis or a significant reputational damage to the brand in the global context, UML earnings could be affected substantially. However with the present global footprint of Mitsubishi, we will not foresee such incident to occur in the short to medium term.
12| LOLC Securities Limited 13 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Appendices
Table 06: Return comparison S&P SL 20 UML ASI Index DIMO % Index 3 months -2.69 0.85 -2.10 2.91 6 months 8.67 2.38 -1.91 11.08 YTD -5.60 -2.99 -6.43 10.03 1 year -3.07 -2.92 -5.88 2.43 Source:CSE, Bloomberg Graph 32: Share Price Movement 6,000,000 130 Highest Price at 01.24.2011: LKR 128.00 Volume Price 5,000,000 5Year Lowest Price as at 07.11.2012: LKR 43.40 SMAVG (50) SMAVG (100) 110 4,000,000
3,000,000 90 Rs
Volume 2,000,000 70 1,000,000 - 50
100.00 RSI (14) 75.00 50.00 25.00 0.00 9/10/12 3/10/13 9/10/13 3/10/14 9/10/14 3/10/15 9/10/15 Source:CSE, Bloomberg
Graph 33: PE Chart Graph 34: PBV Chart
14.00 1.40 12.00 1.20 10.00 1.00 8.00 0.80 6.00 0.60 4.00 0.40 2.00 0.20 0.00 0.00 10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 09/11/12 03/11/13 09/11/13 03/11/14 09/11/14 03/11/15 09/11/15 PE ratio Highest Average Lowest PBV ratio Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 35: Price per Sales Graph 36: Dividend Yield
1.20 16
1.00 14 12 0.80 10 0.60 8 6 0.40 4 0.20 2
0.00 0 10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15 10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15 Price to Sales ratio Highest Average Lowest UML dividend yield Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg
Graph 37: CSE PE Chart Graph 38: CSE PBV Chart
16.00 2.00 15.00 14.00 1.80 13.00 1.60 12.00 11.00 1.40 10.00 1.20 9.00 8.00 1.00 10/01/12 04/01/13 10/01/13 04/01/14 10/01/14 04/01/15 10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15
ASI PE ratio Highest Average Lowest ASI PBV ratio Highest Average Lowest
Source:CSE, Bloomberg Source:CSE, Bloomberg 13 | LOLC Securities Limited 14 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Table 07: Financial Summary Forecast Figures in LKR Mn (31st March) FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F) Income Statement Revenue 17,777 11,041 10,538 14,835 17,950 19,958 Cost of Revenue -13,513 -7,639 -7,811 -10,829 -12,924 -13,971 Gross Profit 4,264 3,402 2,727 4,005 5,026 5,987 Operating Expenses -1,653 -1,504 -1,568 -2,249 -2,685 -2,966 Operating Income 2,698 1,930 1,251 1,821 2,407 3,087 Share of profit of equity accounted invt 0 20 63 79 74 70 Pretax Income 2,713 2,174 1,626 2,086 2,701 3,450 Income Tax Expense -706 -567 -364 -467 -611 -786 Net Profit att. to shareholders 2,014 1,608 1,263 1,619 2,090 2,664
Balance Sheet Cash & Near Cash Items 1,349 911 1,619 1,996 2,334 3,213 Accounts & Notes Receivable 1,164 1,438 1,699 2,386 2,894 3,218 Inventories 2,621 3,324 3,934 4,438 5,311 5,741 Total Current Assets 5,143 5,685 7,281 8,849 10,568 12,201 Total Long-Term Assets 4,073 4,392 5,868 6,054 6,239 6,422 Total Assets 9,216 10,077 13,149 14,903 16,807 18,623 Accounts Payable 745 775 1,213 1,677 2,007 2,169 Other Short-Term Liabilities 952 1,030 1,319 1,619 1,919 2,219 Total Current Liabilities 1,696 1,806 2,532 3,296 3,926 4,389 Total Long-Term Liabilities 149 174 181 199 219 241 Total Liabilities 1,845 1,980 2,714 3,496 4,145 4,630 Share Capital 336 336 336 336 336 336 Retained Earnings & Other Equity 7,034 7,761 10,099 11,071 12,325 13,657 Total Equity 7,371 8,097 10,436 11,407 12,661 13,993 Total Liabilities & Equity 9,216 10,077 13,149 14,903 16,807 18,623
Cash Flow Statement Net Income 2,013 1,608 1,262 1,619 2,090 2,664 Depreciation & Amortization 93 134 138 139 141 143 Changes in Non-Cash Capital 1,248 -923 -428 -726 -1,052 -591 Cash From Operations 3,025 527 596 1,032 1,179 2,215
Capital Expenditures -226 -873 0 -200 -200 -200 Increase in Investments -734 -492 -935 -187 -205 -226 Cash From Investing Activities -911 -1,041 -287 -466 -480 -496
Dividends Paid -605 -874 -605 -648 -836 -1,332 Change in Long Term Borrowings -617 213 351 0 0 0 Cash from Financing Activities -1,223 -662 -255 -330 -516 -1,010 Net Changes in Cash 892 -1,176 55 237 183 709
Source:CSE, Bloomberg, LOSEC Research
14 | LOLC Securities Limited 15 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Table 08: Forecast Ratios FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F) Profitability Ratios GP Margin (%) 24% 31% 26% 27% 28% 30% NP Margin (%) 11% 15% 12% 11% 12% 13% ROE (%) 27% 20% 12% 14% 17% 19% ROA (%) 22% 16% 10% 11% 12% 14% Earnings per share (LKR) 19.95 15.93 12.51 16.05 20.72 26.40 Dividend per Share (LKR) 6.67 8.00 6.00 6.42 8.29 13.20
Credit Ratios Total Debt/Equity Ratio (%) 8% 11% 12% 13% 14% 15% Interest Coverage (X) 24.12 28.90 15.19 21.29 23.08 25.09 Total Assets/Equity (X) 1.25 1.24 1.26 1.31 1.33 1.33 Net Debt/EBIT (X) -0.29 0.36 0.80 0.58 0.49 0.25
Liquidity Ratios Current Ratio (X) 3.03 3.15 2.88 2.68 2.69 2.78 Quick Ratio (X) 1.49 1.31 1.32 1.34 1.34 1.47 Asset Turnover Ratio (X) 1.93 1.10 0.80 1.00 1.07 1.07 Net Asset Value per share (LKR) 73.05 80.25 103.42 113.05 125.48 138.68
Growth Ratios Revenue Growth YOY% -15% -38% -5% 41% 21% 11% Earnings growth YOY% -12% -20% -21% 28% 29% 27% Total Assets YOY% -12% 9% 30% 13% 13% 11% Total Debt YOY% -67% 61% 34% 25% 20% 16%
Investment Ratios PE Ratio (X) 3.21 5.15 7.04 8.97 6.95 5.45 Price to Book Value (X) 0.88 1.02 0.85 1.27 1.15 1.04 Dividend Yield (%) 10.42% 9.76% 6.81% 4.46% 5.76% 9.17%
Source:CSE, Bloomberg, LOSEC Research
Source:CSE, Bloomberg, LOSEC Research
15 | LOLC Securities Limited 16 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Company
United Motors Lanka PLC (UML) is a licenced vehicle importer and distributor in Sri Lanka. It is the sole agent for Mitsubishi vehicles in the country. Apart from its main business of importing and selling automobiles, UML is engaged with vehicle repairing, spare part sales and after sale services, sale of car care and lubricant products and tyre sales. The brands marketed by United Motors and its subsidiaries and associates include Mitsubishi passenger and Fuso commercial vehicles from Japan, TVS two and three wheelers from India, Perodua compact cars from Malaysia, JMC commercial vehicles, DFSK Mini trucks, Yokohama tyres from Japan, JK tyres and Mak lubricants from India and Valvoline lubricants and Eagle One car care products from USA. The United Motors has 9 branches strategically located across the island which offer sales of vehicles and genuine parts as well as workshop services. The UML group has over 2,000 dealers island-wide for the distribution of tyres, lubricants, two wheelers and three wheelers, with representation in both urban and rural areas.
Group Structure
United Motors Lanka PLC(UML)
Subsidiaries Joint Venture
Unimo Enterprises Ltd Orient Motor Company UML Property TVS Lanka Pvt. Ltd (100%) Ltd (100%) Developments Ltd (100%) (50%)
TVS Automotives Pvt. Ltd (100%)
Unimo Enterprises Ltd.
Unimo Enterprises imports and distributes Perodua cars, Morris Garages (MG cars), JMC cabs, DFSK vans, Yokohama tyres and assembly of DFSK vans. The company’s branch network is strategically located in Anuradapura, Kandy, Kurunegala, Matara, Nugegoda, Nuwara Eliya, Ratnapura, Kelaniya and Jaffna while its Yokohama tyre operation distributes its range of products through thirty key dealers located around the island.
Source:CSE, Bloomberg, LOSEC Research Orient Motor Company Ltd.
Orient Motor Company imports and retails small commercial vehicles under the brand DFSK 'Unimo Lokka'. This Chinese truck has been specifically designed for the Sri Lankan terrain and is supported by higher road bearing capacity and more sophisticated features than rivals. Since the introduction of this truck in 2011, 4000 units have been sold while capturing 10% market share.
TVS Lanka Pvt. Ltd.
TVS is a joint venture between UML and T.V Sundaram Iyengar & Sons Limited and TVS Motors of India. The company is specialized in motor cycles, scooters, three wheelers and spare parts. TVS has built an extensive network of distributors and dealers with 205 service points and 160 dealers for sales. TVS two wheeler portfolio includes cycles with the engine capacity of 100/110/125/150/180 cc coupled with scooters and mopeds. TVS three wheeler portfolio consists of locally modified three wheelers under the brand 'TVS King'. This is the first ever three wheeler to be fitted with a 200 cc four stroke engine and it has been very well accepted in every part of the country for its performance and fuel efficiency.
TVS Automotives Pvt. Ltd
TVS Automotives Pvt. Ltd. is a fully owned subsidiary of TVS Lanka Pvt. Ltd. which markets automotive lubricants & Tyres. It is the agents for Bharat Petroleum Lubricants in Sri Lanka and supplies automotive lubricants under the brand of 'MAK Lubricants'.
16 | LOLC Securities Limited 17 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
UML Shareholding Distribution (as at 30. 06.2015)
Shareholder No. of shares % Stake Mr. M.A. Yaseen 61,750,266 61.20% Ms. R.R Yaseen 10,767,210 10.67% Mrs. S,M. Chrysostom 6,945,471 6.88% Mitsubishi Motor Corporation 4,937,142 4.89% Mr. C. Yatawara 1,231,800 1.22% Mr. H.A Van Starrex 690,353 0.68% Capital Development & Invetsment Company PLC 604,209 0.60% Bank of Ceylon 351,182 0.34% Mr. A.M Weerasinghe 301,880 0.30% Deutsche Bank AG Singapore branch 256,527 0.25% Mr. S.D. Yaseen 243,300 0.24% Eagle Growth Fund 225,175 0.22% Mrs. S.T. Xavier 201,085 0.20% Hatton National Bank (Trading portfolio) 187,643 0.19% Waldock Mackenzie Ltd/Hi-Line Trading (pvt) Ltd. 165,354 0.16% Mr. J.A Yaseen 156,177 0.15% Mr. P. Rathnayake 156,000 0.15% Mrs. J.D De Silva Sugathapala 151,433 0.15% Ms. R. Suhayd 151,000 0.15% Mercantile Investment and Finance PLC 150,000 0.15% Others 11,427,419 11.33% Total 100,900,626
Graph 39: Shareholder structure 1 (as at 31.03.2015) Graph 40: Shareholder structure 2 (as at 31.03.2015)
Institutional Resident 23% Non-Resident 48% 52% Individuals 77%
Source: Annual Report FY14/15 Source: Annual Report FY14/15
Corporate governance structure
Apart from 'CEO', 'Finance Director' and 'Director-after sales services' along with 'one non-independent director', the Board of UML is consisting of 5 Non-Executive Independent Directors. There is also a representative from Mitsubishi Motor Corporation, Japan in the Board as a non-executive independent director which leads UML’s Board to make decisions under the close scrutiny of a reputed multinational corporate. Upon analyzing UML’s historical financial information, it is evident that related party transactions have been recorded relatively in less numbers and disclosed in a transparent and explicit manner.
Although a single party exists with a controlling stake of 70%, we believe that the Board has the flexibility to drive the company’s strategy to optimize the stakeholder expectations including minority shareholders mainly due to its sound corporate governance structure along with unambiguous business operating model. The management is also of the view that major shareholders’ influence on company management is at a very minimum level where all the strategic business decisions are made by qualified and experienced business professionals. Given its good corporate governance and sound performance, UML has been recognized amongst the top 100 of the most respected entities in Sri Lanka, which will essentially help to improve investor confidence on the company.
Graph 41: Composition of EDs and NEDs
11% 33% Exe. directors
Non exe. independent directors 56% Non exe. non independent directors
Source: Annual Report FY14/15 17 | LOLC Securities Limited 18 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Key Management (Source: Company Annual Report 2014/15)
Sunil G. Wijesinghe / Chairman - Non Executive Director (Independent)
Sunil Wijesinha is the Chairman of Watawala Plantations PLC, Unimo Enterprises Ltd., Orient Motor Company Ltd., UML Property Developments Ltd. and TVS Automotives (Pvt) Ltd. Mr. Wijesinha is also a Director of BizEx Consulting (Pvt) Ltd., Siyapatha Finance PLC, National Institute of Business Management and TVS Lanka (Pvt) Ltd. He was the former Chairman of NDB Bank PLC, Merchant Credit Ltd and Employees’ Trust Fund Board. He was the former President of Japan Sri Lanka Technical and Cultural Association (JASTECA), Immediate Past Chairman of Employers’ Federation of Ceylon and immediate past President of the National Chamber of Commerce of Sri Lanka. He is a Fellow of Chartered Institute of Management Accountants (UK).
Chanaka Yatawara / Group Chief Executive Officer - Executive Director
Mr. Chanaka Yatawara is a Director of Unimo Enterprises Ltd., Orient Motor Company Ltd., UML Property Developments Ltd., TVS Lanka (Pvt) Ltd. and TVS Automotives (Pvt) Ltd. He holds a degree in Business Administration - Economic from the Lewis & Clark College, Oregon, USA.
Aashiq Lafir / Executive Director (Finance)
Lafir has over 25 years of senior management experience in diverse business activities. He is also a Director of Skills International (Pvt) Ltd. He is a Fellow of the Chartered Institute of Management Accountants (CIMA-UK) and an Associate Member of the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). He also holds a Masters Degree in Business Administration from the Post Graduate Institute of Management of the University of Sri Jayawardenapura
Ramesh Yaseen / Executive Director (After Sales Services)
Ramesh Yaseen is a Director of Unimo Enterprises Limited. He was a former Director of Readywear Industries Limited.
Ananda Atukorala / Non Executive Director (Independent) Source: Annual Report FY14/15 Ananda Atukorala serves as an Independent Non-Executive Director of Orient Finance PLC, Bartleet Finance PLC, UB Finance Ltd., Pragnya Tech Parks Lanka (Pvt) Ltd., Arni Holdings and Investments (Pvt) Ltd., Unawatuna Boutique Resort (Pvt) Ltd., Unimo Enterprises Ltd., TVS Lanka (Pvt) Ltd. and Credence Genomics Private Ltd.
Masafumi Sadawa / Non Executive Director (Independent)
Masafumi Sawada is the General Manager of Asia & ASEAN A Department, Mitsubishi Motors Corporation, Japan
History
The company was founded in 1945 as a Private Liability Company. In 1972, it was vested with the government and carried out operations as the Government Owned Business Undertaking of United Motors. In 1985, the Company entered into a distributor agreement with Mitsubishi Motors Corporation, Japan and has since then been the sole distributor for brand new Mitsubishi vehicles in Sri Lanka. In 1989 the Company was selected as the first Government venture for ‘Peoplisation’ with the intention of broadening its ownership amongst the public. In May 1989, the Company was renamed as United Motors Lanka Limited and incorporated as a Public Limited Liability Company with an authorized share capital of Rs.100,000,000.
In 1994, the company incorporated of a subsidiary - UML Property Development Ltd.. By 2002, Unimo Enterprise Ltd. was acquired by UML and during 2003, 50% interest in TVS Lanka (pvt.) Ltd. was acquired. During 2007, the Company was reregistered under the new Companies Act No. 07 of 2007 as United Motors Lanka PLC. In December 2010, the company increased the number of shares by way of a share split on the basis of two new ordinary shares for every existing issued ordinary share.
Source: Annual Report FY14/15 18 | LOLC Securities Limited 19 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Motor Sector in Sri Lanka
Motor sector in Sri Lanka consists of 6 listed companies (UML, DIMO, ASHO, COLO, SMOT, AUTO)and unlisted companies such as Toyota Lanka, Associated Motorways Pvt. Ltd, Stanford Motors, Ishara Traders, Indra Traders, etc. In addition to that there are various institutional and individual vehicle importers who import and sell brand new and used vehicles originated from different countries, mainly from Japan, India, South Korea, Europe and China. Although primary business in this sector being the importation and distribution of motor vehicles, most of these companies have also been engaging with industry related other businesses including repairs and after sale services, spare-part sales, lubricant and car care products, tyre importing/manufacturing and vehicle assembling. The sector currently demonstrates a growing tendency towards assembling vehicles within the country in order to cater to local vehicle demand.
Total vehicle population of the country accounts for approximately 5.6 million vehicles while 314,155 new vehicles have been registered for the first half of 2015. Amongst listed companies in the sector, UML accounts for the highest market cap which is LKR 10,695 million while the market cap of the sector reaches to be LKR 27.2 billion. These listed players have grown rapidly in last few years with the increased demand for vehicles and other related products/ services. However, the listed companies encounter a severe competition from non-listed vehicle importers since the demand for used vehicles over brand new ones due to unbalanced pricing and substantial brand preference for 'Toyota'.
In recent times, Sri Lankan motor sector has become highly sensitive to frequent import duty changes and fuel price fluctuations. However, despite these uncertainties, the sector has been growing at a rapid phase in the last decade mainly due to increasing the disposal income of general public and prices of vehicles specially motor cycles, three wheelers and passenger cars becoming relatively cheaper and affordable for low and middle income people.
A summarized snapshot of the performance and investor ratios of six listed companies in the motor sector is as follows: Table 09: Financial performance comparison of peers Counter Price(LKR Market Cap Y/E Net NAV(LKR per ROE% ROA% PER PBV Dividend per Share) (LKR Mn) Profit(LKRMn) Share) Yield % United Motors 106 10,695 1262.33 84.34 11.0 7.7 7.5 1.3 6.81 DIMO 690 6,125 596.08 1046.50 9.3 4.6 7.7 0.7 3.17 C M Holdings 137 2,025 283.99 250.18 7.5 5.8 7.4 0.5 4.80 Ashok Layland 1,450 5,250 331.70 758.11 12.8 7.4 15.8 1.9 3.08 Sathosa Motors 300 1,810 261.33 214.46 24.7 12.4 6.3 1.4 - Autodrome 850 1,020 38.27 824.22 4.8 4.2 21.9 1.0 0.8
Source: Bloomberg
Table 10: Selected motor sector indicators Graph 42: Earnings comparison of peers
LKR Mn Indicator Value 2500 2000 PER 8.36 PBV 1.18 1500 Dividend Yield 3.28% 1000
500
0 2013 2014 2015 UML DIMO COLO ASHO SMOT AUTO
Source: LOSEC estimates Source: Bloomberg
Progression made in the road infrastructure development through improved accessibility and connectivity has shown a positive contribution to the motor sector. Road development was lackluster in last few decades due to the war has been given prominence by the governments which were in power time to time. However with the closure of these ethnic conflicts in 2009, transportation infrastructure achieved a remarkable growth during last couple of years. Poor public transportation system in Sri Lanka also plays considerable role in uplifting demand for private motor vehicles. Although public passenger transportation showed some progress in recent times, it is not sufficient to attract commuters who use private modes of transportation at a significantly higher cost. According to the Urban Transport Master Plan developed by Japan International Corporation (JICA), demand for private motor vehicles are expected to grow while share of public transportation is expected to decrease from 58% in 2013 to 41% in 2035.
*Company overview, Group structure, UML shareholding distribution, Composition of Eds and NEDs, Key management, History, SWOT analysis,Industry analysis are taken from the extracts of websites, Annual reports, Bloomberg and LOSEC research materials. 19 | LOLC Securities Limited 20 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
SWOT Analysis
Strengths
- Strong brand name of United Motors with 70 years in business - Sole agent for Mitsubishi motor vehicles along with strong brand image of Mitsubishi in the globe - Experienced and qualified Board of Directors - Diverse product portfolio with wider brand spread - Island wide branch and dealer network to deliver the products - Strong balance sheet, sound cash base and near zero debt position enabling convenient access for funding - Gvt. approval to assemble vehicles locally
Weaknesses
- Heavy dependent on principles' production volumes and allocations (ex. Production halt of Perodua Elite by the manufacturer and delaying to introduce a replacement to the market leading UML to miss the opportunity of import duty reductions on small vehicles)
Opportunities
- Increasing per capita income along with the consumption growth will create a demand for UML's products - Prevailing low interest rate environment will make vehicle leasing products cheaper - Poor public transportation and low vehicle penetration compared with other countries in the region will create demand for private motor vehicles - Growing demand for fuel efficient vehicles (ex:electric, hybrid, plug-in-hybrid electric)
Threats
- Frequent changes of import duties, exchange rates and interest rates - Oil price fluctuations - Heavy competition stemming from other global brands (ex:Toyota, Honda) - Significant demand for used vehicles over brand new vehicles and many institutional and individual players dealing with used vehicles imports - Frequent changes in technology - Reduction and implementing a cap of Loan to Value (LTV) ratio by CBSL
Industry Analysis
Bargaining power of suppliers UML has a high reliance on Mitsubishi Motor Corporation as its main products are Mitsubishi vehicles. Thus Mitsubishi retains a high bargaining power over UML in deciding prices and importing quantities. Bargaining power of customers UML customers will be the general public, private corporates and state enterprises. Since the industry is concentrated with many institutional players and individual importers, customers have relatively high bargaining power in choosing vehicles from various models. However, if the customer is selective for a particular brand like Mitsubishi then their power on bargaining could be relatively less (medium), as they have to rely on UML. Threat of substitutes Public transportation can be considered as the main substitute for motor vehicle industry. Since Sri Lanka does not have strong public transportation system, demand for private motor vehicles are considered to be high. Thus threat of substitute towards the industry is relatively low. Threat of new entrants Threat of new entrants is low due to high capital requirements to enter to the industry. Very few players including UML are capable of setting up island-wide showrooms, distribution net work and assembly facilities through significant capital infusion. Existing Rivalry Rivalry amongst existing listed and non listed companies in this sector is high, because customers have wider product/brand base for their selection.
20 | LOLC Securities Limited 21 | LOLC Securities Limited Initiation Coverage: United Motors Lanka PLC | 01 October 15
Recommendation Guidance
BUY – expected return > 10% in excess of benchmark return SELL – expected return less than benchmark return HOLD – expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.
Risk Level Evaluation
High: Maximum price volatility to be up or down more than 50% monthly Medium: Maximum price volatility to be up or down between 25% - 50% monthly. Low: Maximum price volatility to be up or down less than 25% monthly. Risk Level is calculated taking the historical standard deviation measures.
Financial Glossary
EPS = Earnings per Share ROA = Return on Assets (adjusted net profit/average total assets) ROE = Return on Equity (adjusted net profit/average total equity) CAGR = Compound Annual Growth Rate ((End Value/Start Value) ^ (1/number of years) -1) GP= Gross Profit EBITDA= Earnings before interest, tax, depreciation and amortization PBT= Profit before tax PAT= Profit after tax NP= Net Profit PBV= Price to book value ratio PE= Price to earnings ratio
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