Lights are on, but still dim - Some recovery in 3Q14 on slightly better consumer confidence and new model launches - Inventories looking better - providing a cushion for future production
1Q14 down YoY but better QoQ. Total core earnings in 1Q14 for the three companies under coverage plunged 40% YoY but rose 9% QoQ. The sharp YoY drop was expected, as it was off a high base from last year’s first-car scheme. The QoQ improvement was largely thanks to AH. AH was the only company to report QoQ growth: though the surge QoQ was largely off a low base due to booking impairment loss on goodwill, we note that AH did, however, also report 6% growth in sales QoQ, moving against the industry’s contraction of 2%. Its operating performance overall was also better.
Slowly picking up in 3Q14. We expect 2Q14 to be the year’s weakest on both seasonality and the ailing domestic economy. Looking past that, we expect to see a small recovery for the auto industry in 3Q14 on the beginnings of normalization of auto production numbers YoY after the final deliveries of cars purchased under the first-car scheme in June 2013. The several model launches in the pipeline, including Honda Jazz 2014, Isuzu Celerio and Nissan Navara NP300, all scheduled to debut at the Fast Auto Show Thailand in July, plus a pick-up in consumer confidence from greater political stability, should lead to slightly better domestic sales in 3Q14.
Inventories also looking better. Based on our estimates, the ratio of inventory YTD to auto production has fallen to -0.04 from 0.08 in January. This is good news for the industry, as inventory build-up from the first car scheme remains a large concern. With demand currently outstripping output, some of the pressure created by the high inventories should ease and allow automakers to ramp up production to meet the stepped rise in demand that we expect to start seeing in 3Q14 and 4Q14.
Reduce 2014 auto production to 2.2mn. In May, auto production stood at 148K units, down 36% YoY but up 17% MoM, with 5M14 auto production of 792K units, down 30% YoY. In 5M14, domestic demand was down 42% YoY, weakened by the prolonged political uncertainty. Export growth, initially expected to make up for the fall in local demand, grew a very low 3% YoY. We thus expect the industry to have trouble meeting our current 2.4mn auto production forecast. To better reflect the most recent data, we have cut our 2014 auto production forecast to 2.2mn, with domestic sales of 1.0mn (down from 1.1mn) and auto exports of 1.2mn (down from 1.3mn). Although the Federation of Thai Industries (FTI) continues to maintain its forecast at 2.4mn units, we expect it to cut target in the near future as well.
May be some re-ratings ahead. We maintain our mid-2015 TP for the three companies. Though upside to target prices is very limited, the more stable political environment will be good for the auto industry. Confirmation of this with stronger signs of recovery could lead to a re-rating in the future. In this climate where the industry is not yet in the clear, we like STANLY most due to its high gross margin and strong financial health.