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EUR 9.28 For Business Accounts Only

Pakistan Autos: Non-filer ban is 'sink-or-swim' for OEMs, (AKD Daily, Oct 04, 2018)

  • Citing sizeable headwinds from cost pressures resulting in price hikes, accompanied by rising inflationary pressures hitting buying power and the recent ban on sale of new cars to tax non-filers, we revise down our estimates for automotive sales.
  • Revising our sales growth assumption for CY18/FY19 onwards, we bring down earnings by ~14.5%/~10.2% across our forecast horizon, resulting in FCFE based TPs being cut by 25%/11% to PkR347/1,866/sh for PSMC/INDU, where the relative resilience of premium passenger car OEMs (1,300CC and above segment) is at play.
  • Limits to pricing power hampering earnings growth, flows through to lower GM assumptions, as competitive 'moats', i.e. after sales services and vehicle availability gain prominence.
  • Even so, as both PSMC and INDU have plunged 37% and 18% CYTD, we believe current price levels have largely accommodated dampeners to demand (PSMC/INDU trade at forward P/Es of 8.2/6.6x), with our revised TP' offering capital upside of 11/38% accompanied by D/Ys of 3.2/9.5%, making for Neutral/Buy calls, respectively.
  • We flag developments on new vehicle launches, CAPEX plans, LCV sales and margin preservation as major indicators to monitor over the near term.

Confirmed non-filer sales ban makes a bad situation worse: Auto sales are headed towards a down cycle (8MCY18 passenger car sales average +1%MoM vs. +5%MoM for 8MCY17), brought on by: i) price hikes of 7-12%CYTD for all OEMs on account of PkR depreciation and levies on auto part imports, ii) absence of any new model launches, where the last major launch was the revamped Cultus in April'17, and iii) the general decline of purchasing power as monetary tightening makes auto financing less attractive. Adding to industry woes, the ban on sale of new vehicles to non-filers with the revenue authority was 'the straw that broke the camel's back' as we asserted after the August'18 sales decline in the PC segment (falling 19%MoM/18%YoY).  

Premium players better off: Bifurcating passenger car demand for the last 23yrs by segment, we highlight the relatively softer cycles for sales growth exhibited by the 1,300CC and above segment. Between FY96-18 four clear cycles can be seen for passenger car sales growth, they are 1) FY96-00, 2) FY01-09, 3) FY10-13 and 4) FY14 onwards, with the average cycle lasting 5yrs. Taking cues from these trends, we believe players in the premium segment will be relatively better off when facing the current bout of dampeners to demand.  

TPs for INDU/PSMC cut 25/11%: Revising our sales growth assumption for CY18/FY19 onwards, we bring down earnings for PSMC/INDU by ~14.5%/~10.2% across our forecast horizon, resulting in FCFE based TPs being cut by 25%/11% to PkR347/1,866/sh. Additionally worrisome developments regarding pricing power hinder earnings growth, prompting a cut in our GM assumptions to long term average levels of 7.2%/16.3% for PSMC/INDU, as competitive 'moats', i.e. dealer networks, after sales services, add-on features and vehicle availability become mandatory for sustaining market shares. 

Outlook: Numerous stakeholders stand to play their part in implementing the ban, while the amended Finance Bill goes on to impose punitive measures on companies violating the sales ban. Additionally, on the question of new entrants, it follows that they are likely to feel the heat of reduced demand as well. Developments we flag for close observations that need to be monitored in the near term: i) unintended consequences on pulling LCV sales lower, ii) responsiveness of OEMs to cost pressures, iii) new vehicle/model launches by existing OEMs (Vios and new Alto for INDU and PSMC), and vi) ability of assemblers to preserve margins as the long term competitive environment heats up (new entrants with large CKD assembly capacities to enter the market by CY20).

​AKD Research

Underlying
PSMC

PSMC Co Ltd. PSMC CO., Ltd is a Korea-based company primarily involved in the manufacture of structural materials for semiconductors. The Company's main product is lead frame, a thin piece of copper alloy strip used as a mounting pad for silicon chips and its internal connections. The lead frames include plastic dual in line packages, plastic leaded chip carriers, small outline integrated circuits, quad flat packs, discrete and transistor outlines, as well as others. It also manufactures and markets tools, including lead frame tools, tool parts and fixtures, motor core tools and connector tools; pre-molded products, which are used in image and pressure sensors for cars, medical instruments, photoelectrons and other devices; palladium/nickel pre-plated frames (Pd/Ni PPFs), which are lead frames developed to prevent the discharging of environment pollutants, and electronic connectors.

Provider
AKD Securities Limited
AKD Securities Limited

AKD Securities Ltd. is one of the leading securities firm in Pakistan, providing a comprehensive range of investor focused services, including equity brokerage, economic and securities research, investment banking and financial advisory services. AKD Securities accounts for more than 6% of the average daily value of the Karachi Stock Exchange. AKD Securities was the first brokerage house to launch an online trading platform in Pakistan in November 2002 and now has the largest market share with over 6000 customers. This has helped diversify and expand the retail investor base in the country and ushered in a whole new universe of investors to the stock market.

AKD Securities Ltd. caters to a diversified group of domestic and international institutional investors, high net worth individuals and upscale retail clients, including expatriate Pakistanis. With high quality research, unparalleled execution and distribution capability for both regular and large block trades, AKD Securities Ltd. has earned an outstanding reputation in the Pakistani securities industry.Outside of commercial banks, AKD Securities Ltd. is one of the biggest capital market firms in the country. AKD Securities is the leader in raising and providing risk capital in underwriting, market making and mergers and acquisitions in Pakistan. Good corporate governance and professionalism are emphasized throughout the firm and AKD Securities Ltd. is amongst the very few companies to have introduced a firm-wide comprehensive CODE of ETHICS, overseen by an independent compliance manager.Ultimately, our success is based on the quality of service we provide to our customers and the trust and confidence reposed in us by them. Our focus, therefore, remains on customer satisfaction at all levels in the company.

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