Elixir Securities Limited – Elixir Insight

Karachi, January 11, 2018 (PPI-OT): Automobile Assemblers – Soft December Sales Fail to Mask Strong 1HFY18 Performance

Passenger car sales for the month of Dec-17 fell 6% sequentially as customers delayed buying until the New Year. However the overall sales growth remained robust as can be gauged from 15/20% YoY increase in Dec-17/1HFY18.

Amongst assemblers, PSMC outperformed the segment with sales growth of 1/29% MoM/YoY in the outgoing month owing to robust demand in the 1000cc segment which is dominated by the company.

Tractor and pickup sales also remained strong during 1HFY18 growing 54% and 22% respectively against SPLY.

We maintain a Marketweight stance on the sector identifying i) expected reversal in economic cycle and ii) entry of new competition as key risks to the current players. However we hold that the current delivery period of 2-6 months will likely provide a lag in the translation of these factors onto the existing players.

Growth in Small Cars Enables Flat PSMC Performance despite Year End Impact: As per the latest Automobile Sales numbers released by Pakistan Automotive Manufacturers Association (PAMA) passenger car sales for the month of Dec-17 clocked in 16,159 units, down 6% MoM but up 15% YoY. Overall this culminated in volumetric growth of 20% YoY in 1HFY18.

Amongst the industry players, Pak Suzuki (PSMC) was the outperformer in the outgoing month where sales increased 1/29% MoM/YoY buoyed by strong growth in the 1000cc sub-segment which grew at a robust pace of 22/59% MoM/YoY. The growth in the segment strengthens the speculations in the market that new players i.e. KIA, United Autos and others may target the space with their new product offering especially following the change in duty payment mechanism for imports which were dominated by smaller cars.

Meanwhile automobile sales for Honda Atlas Cars (HCAR) and Indus Motors Company (INDU) lagged behind falling 28% and 14% sequentially as customers delayed buying until the New Year. However disappointing sales in December could not hold back the impressive 1HFY18 performance where volumes for HCAR and INDU increased 50% and 6% YoY respectively as the latter has faced continued capacity constraints hampering volumetric growth.

Please refer to the enclosed table for detailed sales numbers.

1HFY18 Sales Remain Strong for Tractors and Pickups: During the outgoing six months, Tractors sales increased 54% YoY despite 11% sequential decline in offtakes. Within the segment Millat Tractors (MTL) continues to maintain its strength, as sales grew in line with the segment, with a market share of 64%.

During the same period, pickup sales increased 22% against SPLY owing to impetus from the ongoing CPEC construction and expected subsequent transit activity. The same is also the key driver behind the expected launch of products in the category by new players where Daehan Dewan Motor Company is expected to reintroduce its Shehzore lineup in collaboration with Kolao Group of Korea. Concurrently the Hyundai H-100 pickup was on display at the ground breaking ceremony leading to expectations that the same may be offered by Nishat Hyundai in the domestic market.

Downturn in Economic Cycle and New Competition Remain Key Risks to the Segment: Despite robust volumetric growth, we maintain a Marketweight stance on the automobile sector of Pakistan owing to the ongoing theme of reversal in monetary cycle and the upcoming entry of several new players in the sector. Almost 40% sales of the sector are financed through bank borrowing and therefore the sector may see a downturn in demand if interest rates rise significantly from current levels. However the current waiting period for sedans ranges from 2-6 months which will likely act as a lag period before these factors translate onto demand.

Concurrently PKR depreciation will increase the assemblers’ cost due to high import component which can put downward pressure on margins. However we identify that the sector does enjoy significant pricing power and can pass along higher costs to defend margins as can be ascertained from the recent price hikes by all three Japanese automobile assemblers in Pakistan.

Within the sector, we maintain a Buy call on INDU owing to its upcoming debottlenecking which acts as an upside trigger by allowing it to boost volumetric sales which are currently capped by capacity constraints and also reduce finance cost on late deliveries as the company will be able to service customers faster. Simultaneously, the expected entry of the new players in the SUV and small car segments will likely offer limited competition to the company’s flagship Toyota Corolla.