JS Securities Limited – Morning Briefing

Karachi, June 14, 2018 (PPI-OT): Autos: New entrants to increase industry capacity by more than 60%

With the new Auto Policy, there has been a flurry of new entrants looking to benefit from the incentives offered under the policy ambit and from booming local auto demand.

We attempt to provide information on the new entrants entering the local space, including planned capacities, expected investments and estimated time of commencement of operations.

So far, eight companies have been granted Greenfield status, while two companies have been allowed Brownfield status under the new Auto Policy.

We believe existing OEMs can likely employ a strategy of product diversification in order for them to protect their market share.

New entrants investing ~US$820mn

We shed light on auto companies that are entering the local market, their potential investment size, capacities and the various segments that they are expected to target during the initial years of entry. To recall, with the introduction of the new Auto Policy (ADP 16-21) – which provides duty and other incentives to new entrants over existing assemblers – there has been a flurry of companies that have pledged investment in the local auto sector to grab a potential chunk of the booming auto market.

These include the likes of Kia Motors from South Korea in collaboration with the Lucky Group (Kia-Lucky Motors) and Hyundai Motors from South Korea with Nishat Group (Hyundai Nishat Motors). As can be seen from the table, the potential investments coming from the new entrants are estimated around US$820mn (including US$110mn pending cases). Eight companies have been granted Greenfield status so far under the Auto Policy, while two companies have received Brownfield status and some cases are pending for approval. Renault, as per media reports is expected to enter the market in collaboration with Al Futtaim Motors has not yet completed the application process as per our channel checks, and is therefore not included in this analysis.

Tough times ahead for existing assemblers

Total additional capacity from new entrants is estimated at 192,000 units, the bulk of which is expected to directly target the market dominated by existing players such as Pak Suzuki Motors (PSMC), Indus Motor Company (INDU) and Honda Atlas Cars (HCAR). The total automotive capacity (Passenger Cars, LCVs, SUVs) of the country is expected to increase from existing ~280k units (including INDU’s 10k units CAPEX and FAW) to ~465k units within the next 2-3 years, which may limit the breathing space for existing OEMs. We believe that existing OEMs can likely employ a strategy of product diversification in order for them to protect their market share.