AKD Securities Limited Equity Research – Daily Report

Karachi, November 19, 2018 (PPI-OT): Pakistan Auto: Increased competition = increased CAPEX

An analysis of updated financial accounts for auto OEMs reveals a clear upswing in industry CAPEX with the last twelve month total outlay reaching PkR7.6bn with PSMC/INDU/HCAR contributing 46/38/16%.

Looking at CAPEX outlays for the three major OEMS, we find that INDU and HCAR maintain higher investment levels per model sold (reflected in frequent model launches, better features), while PSMC has recently caught up, with CY18 CAPEX/unit hitting levels seen in HCAR (PkR28.4k/unit).

On the other hand, CAPEX is reflected in poor free cash flows, where a historic analysis of cash flows show that variations in net working capital (movement of current assets and liabilities) are a greater threat, where pressures from the same forced PSMC to acquire ST borrowing to fill the gap.

We believe the wheels are in motion for introduction of a new variant (most likely the Alto) to replace the Mehran, with investment in Techno Glass (subsidiary to manufacture windshields) offering additional catalysts. Our Dec’19 TP of PkR313/sh (risk free rate/risk premium of 13/6%) offers a total return of 28% to last close, while the stock trades at a relatively inexpensive CY19 P/E of 5.1x