AKD RESEARCH March 31, 2021 PAKISTAN REP-019 AUTOS VISTA Change is most definitely in the air Local and foreign automakers have lined-up to avail benefits offered by ADP-II before it’s Ammar Javed expiry in Jun’21, having already attracted foreign investment of over $1bn till date. Simul- [email protected] taneously, all eyes are set on the next ADP that is expected to incentivize localization. 111-253-111 Ext: 602 The core affluence market for premium sedans faces competition from Hyundai Elantra and expected KIA Cerato as well as from compact SUVs including KIA Sportage, Hyundai Tuscon, DFSK Glory 580 Pro, Proton X70, MG ZS and MG HS (currently only CBU). The small segment, previously dominated by PSMC, has also witnessed competitive pres- sures, with variants offering wider options such as United Bravo, United Alpha, Prince Pearl and KIA Picanto. Despite growing competition, an ever strong dealer network entrenched across the coun- try as well as commanding presence especially in the rural market makes for a continued case for INDU where recent PkR appreciation and possible introduction of new Corolla by FY23 makes for further upsides. Given average monthly volumes of PSMC rising by ~2,000 units in last 2 months and ex- pected launch of new Swift, a short term upside in the stock cannot be ruled out. Price vs Displacement (Price) (Displacement CC) Source: AKD Research ADP-II – concluding on a high note: Anticipated pickup in competitive pressure kicked-off at the tail-end of 2020 and has continued well into the current year, where we have highlighted this spike in chatter fueling market expectations of additional auto OEMs (mostly of Chinese AKD Securities Limited AKD RESEARCH origin) lining up to avail tax and duty relaxations offered by the Automotive Development Policy 2016-2021 before it’s expiry in June 2021. To recall, ADP has attracted cumulative foreign invest- New Entrants following ADP 2016-21 ment of over $1bn. The influx of new players offering new models at competitive prices has transformed the automotive industry of Pakistan over the past couple of years which not long Local Player Foreign Partner KIA Motor Company Lucky Motors ago had very few and mainly Japanese options. The response of the big 3 players namely Indus (South Korea) Motors, Pak Suzuki and Honda Atlas that constitute almost 90% of the Passenger Cars (PC) & LCV Corporation Ltd Groupe PSA (France) segment, as well as incentives expected in the next AIDP expected this year, will be imperative in Hyundai Motor Company Hyundai Nishat and Sojitz Corporation determining future direction of the industry. Motor Pvt Ltd (Japan) Koreans kicked-off competitive forces: The latest round of competitive pressures in the domes- Changan Automobiles Master Motors Ltd tic auto landscape began with the return of South Korean auto giant KIA in partnership with (China) Morris Garage (MG) Lucky Group. Lucky Motors launched a compact SUV, KIA Sportage in July’19 and a family hatch- JW-ZES back, KIA Picanto in Aug’19. KIA Sportage continues to receive an overwhelming response from Motors (China) Regal Automobiles Dongfeng Sokon the local market, primarily because of it being priced in line with premium sedans, with average Industries Ltd (RAIL) (DFSK) China monthly sales of 1,500 units. This year, Lucky Motors entered the premium SUV segment previ- Ghandhara Industries Ltd Isuzu (Japan) ously dominated by Toyota Fortuner, by launching KIA Sorento. Overall, the company sold 2,500 cars in January, surpassing HCAR to become the third largest player in the industry. Going for- Al Haj Group Proton (Malaysia) ward, Lucky Motors plans to launch KIA Cerato in the sedan segment by June’21. A noteworthy Beijing Automotive Sazgar Engineering Industry Co (BAIC) (China) development is possible inroads to assemble Peugeot 2008. Hyundai, another South Korean Works Ltd Great Wall Motors Auto Manufacturer also returned to Pakistan in 2017 as Hyundai Nishat Motors Pvt. Ltd. setting (GWM) (China) up a manufacturing plant with annual production capacity of 15,000 units. The company entered Source: AKD Research the PC segment with launch of a compact SUV, Hyundai Tuscon in Aug’20 that sold over 500 units last month. This month the company announced launch of a premium segment sedan, Hyundai Elantra in 2.0L variant. The positive reception of these entrants is likely to make the core affluence market of premium sedans more competitive. The Chinese are coming: A Chinese automaker, Changan, also entered Pakistan in 2018 in part- nership with Master Motors Limited and introduced an entry level sedan, Changan Alsvin in Jan’21, which currently stands as the cheapest sedan in Pakistan. Master Motors has an annual production capacity of 30,000 PC. Sazgar, the only listed Auto-Rickshaw manufacturer in Paki- stan, partnered with Beijing Automotive Industry Company (BAIC) to introduce 3 BAIC cars namely an off-roader, BAIC BJ40 Plus, a compact crossover, BAIC Senova X25 and a hatchback, BAIC Senova D20 in Pakistan. The company’s assembly plant with an annual capacity of 24,000 cars is expected to become operational by the upcoming April. While United Motors continues to compete in the small segment with United Bravo and United Alpha, against the incumbent Pak Suzuki’s Alto, PSMC has announced plans to launch new Swift this year. Investment Perspective: While PSMC may continue to sustain healthy sales in the near term driven by lower interest rates, INDU remains our preferred play in the sector where trusted brand name, strong dealer network and popularity in the secondary market give it a competitive advantage. High historical gross margins confer INDU the power to keep prices low and stimulate demand through extensive advertising and promotion, thereby preventing newcomers from taking up its market share. Moreover, the recent PkR appreciation of 9% from bottom makes for a conducive environment for the sector. With the economy on revival mode, auto sales have witnessed an increase of 41%%YoY in last two months whereby the listed OEMs are likely to remain in the limelight. 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