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PSMC: CAPEX upliftment could add excitement

Since the release of AIDP-II and inherent incentives to new entrants setting up the path to enhanced competitive pressures, incumbents have responded in disparate manners. Picking up on observable trends regarding heightened CAPEX, leading to a new model rollout, or upgradation of previous offerings, we delve into provisioned CAPEX at the company level. With PSMCs recent CAPEX additions detailed in 9MCY17 accounts, raises our expectations of a possible extension to its product line in the coming six months. Detailing our observations, we highlight the increased CAPEX commitments (PkR3.6bn in 3QCY17 vs. PkR1.3bn in 4QCY16) and technical fee paid to the Holding company (PkR1.08bn paid during 9MCY17 vs. PkR0.83bn during 9MCY16) as indicative of operational developments, as pickup in both headers has preceded the last two CKD model launches. In the backdrop of low priced new entrants, we hold our stance of PSMC having to undergo higher CAPEX regardless of GoP negotiations, as indicated in the OEM's recent accounts At current levels, our TP of PkR800.66/sh offers 50.21% upside.

What CAPEX brings to the table: Expanding on PSMC's detailed accounts CYTD we highlight: 1) stark build up in CAPEX, particularly in additions to plant and machinery, 2) increased commitments to expand on planned additions with the stated amount at PkR3.6bn in 3QCY17 vs. PkR1.3bn in 4QCY16, and 3) heightened activity with regards to transaction with holding company, where the trend of higher technical fees (PkR1.1bn expensed during 9MCY17, highest ever fee paid during the period vs. PkR0.83bn for 9MCY16) has been observed during the build-up of a new model launch.  

Something new could be brewing: Considering the CAPEX and the presented case, there could be two possibilities: 1) launch of a new model or 2) upgradation of existing variants. Looking at each model on offer, their contribution to revenues and deletion levels prevalent in the manufacturing process, we highlight likely candidates for upgradation (see table on RHS). Additionally, measuring the sales increment from upgrades/additions in similar passenger car segments as PSMC's, we highlight the growth in demand emanating from recent additions (Wagon R, new Cultus) as being material in raising revenue growth.

Investment Perspective: Highlighting previous tussles with regulators, PSMC has had a rocky reception to AIDP-II, marking the absence of incentives for incumbents as being detrimental to its plans to invest US$440mn for planned CAPEX that involved building a modern plant on an accelerated schedule, introducing 4 new models from this plant within the next 5 years with 2 models being released by CY18.  In the backdrop of low priced new entrants, we hold our stance of PSMC having to undergo higher CAPEX regardless of GoP negotiations, with recent detailed accounts highlighting the same. At current levels our TP of PkR800.66/sh offers 50.21% upside.

 

AKD Research