Somboon Advance Technology

Investment thesis

The automotive industry should recover HoH in 2H14—the worst of the post-first time car buyer scheme collapse in sales is now behind us. Therefore, SAT should deliver better HoH numbers. Besides, the firm will receive new orders from Mitsubishi and Kubota next year. We forecast FY15 sales growth of 10% YoY to Bt8.8bn for SAT after a projected 11% YoY decline to Bt8bn in FY14. Our model indicates FY14 earnings of Bt614m, down 37% YoY, then a 42% bounce in FY15 to Bt870m. The stock trades at an FY15 PER of 9.0x, somewhat below its long-term mean of 9.8x. Our BUY rating stands.

Gradual recovery in 2H14 onward

Management maintains its FY14 sales contraction guidance of about 10%, which is much shallower than the scale of the dive for the industry as a whole. SAT assumes 2014 nationwide auto production of 2.0m units (down 18% YoY). Hence, it has increased production of agricultural vehicles for Kubota (tractors—from 64k units in FY13 to 72-80k units in FY14 and 85k units in FY15). We forecast an FY14 sales drop of 11% YoY, then an FY15 sales rise of 10% YoY.

Capacity utilization will rise gradually

SAT expanded the output capacity of its product champions—axle shafts (by 10-15%), coil springs (by 20%)—and is building a new production line that will make parts for big trucks and new orders for Kubota and Mitsubishi for which revenue is slated to start flowing in 4Q14. Thus, its capacity utilization will rise next year in tandem with sales expansion. SAT’s capacity utilization rate was 83% in 1Q14 and 73% in 2Q14. The FY13 capacity utilization rate was high 90%. 

GM and net margin will expand in 2H14 onward

Following poor GM of 17.6% and net margin of 7.4% in 1H14, the firm guides for HoH margin improvements in 2H14, driven by higher sales. We conservatively assume GM of 17% and NM of 7.7% in FY14, following 17.5% and 10.8%, respectively, last year. We also model for GM of 17.7% and net margin of 9.9% in FY15.

New offshore investment to support growth in FY16

SAT plans an overseas investment valued in the Bt400m-500m range in FY15, to be financed by internal cash flows. Management hasn’t decided yet which country will host the investment, but has shortlisted Indonesia, Malaysia and Japan. The project is budgeted to break even in four years. Note that the firm has substantial cash in-hand of Bt700m. We have not yet factored this project into our model.