AH reported 2Q14 net earnings of Bt101m, down by 46% YoY and 34% QoQ. The result, however, was 31% above our estimate (but was 30% below the Bloomberg consensus), attributable to better sales than assumed. Its 2Q14 sales of 3.6bn were 20% over our number. AH’s 1H14 earnings represent 46% of our FY14 projection.
Sales slipped 7% YoY but rose 2% QoQ to Bt3.6bn. The QoQ top-line expansion was due to rising orders for export and for new models. In contrast, industry-wide 2Q14 auto production dived by 29.7% YoY and 15.9% QoQ to 435k units. GM was squeezed to 3.0% from 6.1% in 1Q14 and 7.3% in the same period last year. Note that AH’s 2Q14 sales were 20% over our number because of (very slim-margin) car-dealer business for Ford-Mazda in Thailand and Honda in Malaysia. As such, its 2Q14 net margin dropped to 2.8% from 4.8% in 2Q13.
Looking ahead to 2H14, a major client, Isuzu Motors, plans to increase exports of pick-up trucks (Isuzu D-Max), enabled by production capacity expansion for the Isuzu D-Max from 200k units per annum to 400k units within a couple of years. Isuzu’s investment cost for its expansion is about Bt6.5bn. Assuming no delays to this new production (mostly for export), AH should benefit substantially because it is Isuzu’s sole supplier of chassis frame sets for the D-Max. This could mitigate the effect of weak local car sales during 2H14.
Our earnings projections stand unchanged at Bt554m for FY14 and Bt600m for FY15.
AH is a SELL rating for the following reasons: 1) there is downside risk our new FY15 sales projection, 2) the possibility of further GM squeeze if auto production were to be lower than we currently assume and 3) delays to the launches of new car models by auto makers. In short, AH’s 3Q14 earnings outlook is fairly bleak, through no fault of its own (there’s little that can be done when your industry is in a slump). We would like to see some forward indicators of an improving auto industry before we considered changing our recommendation.
We have rolled over our investment horizon to YE15 with a new target price of Bt15.6, pegged to justified PER of 8.4x (0.5 SD over long-term mean).