Bank: Auto Hire Purchase

Benefits to come if interest rate gets cut

Bank: Auto hire-purchase

Expecting result of MPC meeting (20 Feb) and response of corporate net lenders

The meeting of Monetary Policy Committee (MPC) would be held on 20 February

2013. The market expects the Bank of Thailand to cut the interest rate (1-day RP)

once again after the slash of 0.25% to 2.75% on 17 October 2012 because of risks

from unstable global economy. Accordingly, most commercial banks (which are

corporate net lenders) have announced to cut the loan and deposit rates. While the

loan rate has been cut by 0.125%, the deposit rate has been cut even further by

0.125-0.25% to respond with the BOT's policy of low interest rate. This is for the

sake of domestic economic growth, especially in terms of domestic investment and

spending which have been affected constantly by the deceleration of global

economy. The reason for this round of interest rate cut is different which is to block

the fund inflow. We're still not confident whether commercial banks would

correspondingly cut the interest rate in the money market or not since the

economy and growth of loan still have aggressively marched forward. Moreover,

most commercial banks' cost of deposit has increased alongside the aggressive

deposit raising in the system. Nevertheless, if the commercial banks cut the

interest rate, it would benefit 7 leasing entrepreneurs under our coverage

(including SINGER from retail sale sector), especially the auto and motorcycle hirepurchase

companies: ASK, GL and TK. We aren't convinced that these

entrepreneurs would cut the leasing rate since the demand for loan is still

aggressive and during the interest rate uptrend, most entrepreneurs hadn't revised

up the interest rate because of highly aggressive competition. For AEONTS and

IFS, AEONT's loan structure focuses on cash loan (mostly floating-rate loans) while

IFS focuses on factoring loan business which is also a floating rate. Accordingly, we

project that AEONTS and IFS are unlikely to get much of benefits from the interest

rate downtrend. For KCAR (the entrepreneur of auto hire for operating lease and

used car business), it barely has benefited from the interest rate downtrend

because the company's revenue isn't in the form of interest income but a fixed

income from rental fee while most of the capital is fixed cost from car financing

from domestic banks, which is currently in a very low level already. However,

KCAR has obtained some benefits during the interest rate downtrend because

some of its debt structure is floating rate. For JMT (the entrepreneur of debt

management), most revenue structure isn't based on the interest rate; however,

some of the company's debt structure is a floating rate, so it would also get

benefits. In terms of SINGER, although it is in the retail sale sector, the company

has expanded its business with hire-purchase for trade receivable. Nevertheless,

with the current debt structure which is fixed interest rate and the revenue

structure which is fixed interest rate, SINGER barely has benefited from the

interest rate downtrend except for psychological benefits as consumers would

make their move on more spending due to the low interest rate.

ASK, GL, and TK benefit most during interest rate downtrend

For ASK (entrepreneur of auto hire-purchase), GL and TK (motorcycle hirepurchase),

they're projected to benefit the most from the interest rate downtrend.

Considering the debt structure of these companies, there's short-term debt which

is mostly floating interest rate (except TK with 40% of floating-rate debt). For the

loan structure, it is fixed interest rate which would be beneficial for the companies'

spread in 1Q12 which is the turn of the industry's peak.



Top picks are AEONTS and TK due to tendency of outstanding ESP growth in 2013

Our top picks are AEONTS (BUY: 2013 fair value is B112.85) from the consumer

finance sector and TK (BUY: 2013 fair value is B20.23) from the auto and

motorcycle hire-purchase sector due to 2012-13 net profits that tend to grow

aggressively. Other than that, the average dividend yield of TK in 2012-13 is

outstanding at over 5% p.a. (illustrated on the following page).