June 08, 2012 THAILAND EQUITY Investment Research Daily Thailand Research Team +66 (0) 862 9743 Thai Rung Union (TRU) Auto outlook in Thailand remains strong • Turnaround stock after diversifying revenues away from modified pick-ups; • Growth in Thailand’s auto industry continues unabated; Buy • Commercial vehicles sapping up capacity resulting in back-logs; Fair Value THB12.30 • Market is no longer reliant on Europe; • We recommend a Buy for this stock with a TP of Bt12.30 p/share (+40%). Price THB8.80 Turnaround Thai Rung Union is a turnaround counter focusing on tools, OEM parts and Automobile Sector Thai Rung Union Car Plc is a Thai-owned a top-level contract assembler for both semi and complete component, shrugging away and managed group whose business is its image as a modified pick-up truck manufacturer. Currently 55% of revenues are from ranging from product design and tooling and OEM parts; and 31% is from integrated assembly & painting where growth development through the productions of dies and jigs and the manufacture of prospects appear very attractive. TRU’s management has told us that this year rev enues automotive parts, to wagons or seven- can grow up to 40% yoy, while in 1Q12 they grew 32%, yoy. The company has said that seater multi-purpose vehicles using its expertise in the design , development and additional contracts will heighten 2Q revenue (we believe that some 1Q12 sales were assembly of motor vehicles. back-log orders from 4Q11). TRU operates two factories, one in Thonburi and also at the Amata Industrial Estate on the Eastern Seaboard (neither being effected by 4 Q11 floods). Stock Statistics Last month TRU signed a contract to assemble and paint Nissan CBUs at Rayong. GM is Bloomberg Ticker TRU TB Share Capital (m) 492.4 also a major customer here. Market Cap (USDm) 4,332.9 Industry players positive despite global slow-down Management believes that the 52 week H │L Price (Bt) 10.70 4.38 3mth Avg Vol (‘000) 1,496.7 auto-industry will grow close to 2.1m units this year ahead of an earlier forecast for 2.0m YTD Returns (%) 60.0 vehicles from 1.5m in 2011 (+43%) and which is also slightly higher than forecasts set by Beta (x) 0.77 the Federation of Thai Industry (FTI). In 2010 Thailand produced 1.7m units and is Major Shareholders (%) expected to hit 2.5m by end-2014 according to industry players that we’ve spoken with. Mrs. Pranee Phaoenchoke 49.1 Between 1.2-1.5m units will serve domestic demand from 2012 until end-2014. Toyota Ms. Kaewjai Phaoenchoke 6.5 held a 48% market share in 1Q12 followed by Mitsubishi with 21% and Nissan, 16%. Mr. Wuttichai Phaoenchoke 6.2 Mr. Sompong Phaoenchoke 5.4 Other players are Ford, Mazda, Isuzu and GM. Honda will re-start operations this month but in 1Q11 held a 6% market share. Share Performance (%) Expansion continues unabated Ford announced an additional investment in Thailand Month Absolute Relative only last month to build a gate-way factory for 100,000 vehicles per year while GM just 1m -8.3 1.4 3m 43.1 43.6 completed an engine plant at the end of 2011 and has reported that this will run at full 6m 71.2 52.0 capacity utilization this year. Nissan will also operate at full capacity as additional model s 12m 57.9 37.6 are shifted to Thailand. Isuzu reported that they plan to expand pick-up production by 6-month Share Price Performance another 40-50% over the next two years. Toyota, Honda, Mitsubishi and Suzuki have also 11.00 announced continued investment and boosts to capacity of between 40,000-110,000 10.00 vehicles per year between 2012-end13. This production is geared towards the eco-car 9.00 and the small-car in general. 8.00 Eco-co car is one growth driver Manufacturers are shifting more production to Thailand 7.00 to benefit from incentives and tax relief under a scheme to manufacturer eco-cars, not 6.00 unlike Indonesia’s Low Cost Green Car (LCGC). Major car-makers will produce up to 5.00 100,000 eco cars by end of 2015 however, this target could be over achieved and Nissan 4.00 Dec-11 Jun-12 is expected to reach 80,000 of these vehicles by end-2012. FYE Dec. (THBm) FY10 FY11 FY12f FY13f FY14f Revenue 1,970.2 2,054.8 2,897.2 3,505.7 4,050.6 Net Profit 186.4 186.2 469.7 575.3 644.5 % chg y-o-y n.a -0.1 152.2 22.5 12.0 EPS (Bt) 0.37 0.38 0.95 1.17 1.31 DPS (Bt) 0.25 0.25 0.43 0.53 0.59 Dividend yield (%) 2.8 2.8 4.8 5.8 6.5 ROE (%) 7.2 7.0 17.3 19.2 19.1 ROA (%) 11.2 10.0 17.3 25.6 27.4 PER (x) 23.8 23.2 9.3 7.5 6.7 BV/share (Bt) 5.3 5.4 6.1 6.5 7.2 P/BV (x) 1.7 1.6 1.4 1.4 1.2 EV/ EBITDA (x) 13.3 12.2 7.3 6.1 5.3 Notes: 2010 restated OSK Research | See important disclosures at the end of this report 1 June 8, 2012 Commercial vehicles sapping up capacity resulting in hefty back-logs According to TRU, domestic and regional demand is growing strongly especially for commercial vehicles. These vehicles include vans, trucks (3 tonnes), tractors and other agricul tural vehicles and given the nature of Thailand’s auto industry where several manufacturers outsource assembly and parts production, this is seeping up capacity and resulting in back-logs building up. This growth is in line with trends to modernize trade a nd higher living standards (15% of TRU’s revenue is directly serving industrial vehicles and machinery). Several major manufacturers have reported back-log orders for several months (truck markers have reported back-logs for up to two years). Major market is no longer Europe As of April 2012 according to the Automotive Industry Club, demand for CBU is coming from SE Asia (27%), the Middle-East (27%) Australia and New Zealand (21%) and Africa (5%). Europe accounted for only 9% of Thai automobile exports an d this is down from 11% in 2011. This is in stark contrast to five years ago when European demand took the largest slice. Domestic and regional sales have since risen sharply and now Thailand is a more diversified manufacturing base with pick-up one tonne accounting for 72% of export sales in April 2012 compared to more than 90% in 2007. Parts suppliers are also exporting Thai parts manufacturers have also informed us that they’ve seen a step up in orders from other markets, including from Latin America, the Middle-East, Myanmar and the Philippines as those markets also develop their own auto- industry and car market in general. The old business Modified vehicles account for only 5-6% of revenues and these vehicles are mostly specialized such as the MUV4 military utility vehicle which are made to order on a cost plus basis. Room to grow showrooms TRU still has a small show room and car repair business—the company sees opportunity to expand in this area. We see some opportunity to leverage off their relationships with major players to sell new vehicles. This is a lower margin business but can help shield the attractive GPM of the parts and tools businesses. Offering 40% upside We target THB12.30 p/share based on a 12.9x 12PER or 10% discount to Somboon Advanced Technology (SAT), the listed market leader for car parts manufacturing. Our discount takes account of SAT being better known in the market and having a more sizable market cap of US$295m. However, based on our conversations with both companies, TRU appears to offer notably better earnings growth prospects over the short-medium term (about twice as much) and is debt free. SAT is perhaps a “premium player” being the market leader in axle shafts and number two for disc drum brakes however TRU is also well known for patented stamping technology. Applying the same comparative approach to 2013 earnings, TRU’s implied price is THB13.7. Figure 1: Auto Production Volume in Thailand Q1/12 Remark: Q2/11 effect from Japan’s Tsunami, Q4/11 Thai Flood Source: The Federation of Thai Industries OSK Research See important disclosures at the end of this publication June 8, 2012 Figure 2: Revenue Breakdown & Export of Complete Built-up by Brands 1Q12 Remark: Honda had no export volume in 1Q12 because it has not yet recovered from the flood. Source: TRU & The Federation of Thai Industries OSK Research See important disclosures at the end of this publication June 8, 2012 OSK Research Guide to Investment Ratings Buy : Share price may exceed 10% over the next 12 months Trading Buy : Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertain Neutral : Share price may fall within the range of +/- 10% over the next 12 months Take Profit : Target price has been attained. Look to accumulate at lower levels Sell : Share price may fall by more than 10% over the next 12 months Not Rated (NR) : Stock is not within regular research coverage All research is based on material compiled from data considered to be reliable at the time of writing.