Automotive Sector

Automotive sector

Back to normal in 2013 after end of stimulus program, with production up
10%, down from high gear of 65% in 2012
Industry-wide benefits dimmer: look for stocks with specific positives
SAT is top pick with the strongest earnings growth.
3Q12 earnings – SAT did best. Auto production hit a record high in 3Q12 at 652K
units, up 37% YoY and 18% QoQ. However, of our coverage, SAT was the only one
delivering record core earnings and its earnings beat expectation. STANLY and AH were
good at the top line, but margins were problematic. STANLY was pressured by higher
depreciation and start-up costs for its new plant and AH’s earnings are always volatile,
with fluctuating costs indicating some problem with cost management.
Recent data: Record-high on all fronts in October. In October, all industry data -
auto production, domestic auto sales and auto exports - achieved all-time highs and
showed strong YoY growth due to the low base from the flooding last year. Auto
production was 252K units, up from 49K units in October last year and 10% MoM.
Domestic auto sales were 143K units, up from 43K units in October last year and 8%
MoM. Auto exports numbered 98K units, up from 51K units in October last year and flat
MoM. For 10M12, auto production was 1.9mn units, increasing 46% YoY. We estimate
auto production at 2.4mn units, up 65% YoY in 2012 off last year’s low base caused by
the supply chain disruption from Japan’s disaster in March 2011 and the floods in
Thailand in October–November 2011 plus the spur to domestic demand provided by the
government’s excise tax cut for first-car buyers in 2012.
Back to normal in 2013 with 10% auto production growth, mainly driven by auto
exports. The acceleration in auto production is reaching its final stretch in 4Q12, as it
approaches the end of the low base effect from last year’s flooding. Automakers are
already running at high utilization of at or close to 100% and the stimulus provided by
the excise tax cut for first-car buyers will end this year. Although the government has
extended the time allowed for delivery of a car bought under the program through
March 2013 (from December 2012), purchases still have to be made this year, thus, as
we close the year down, we do not expect this program to be a strong impetus into
next year. As things normalize, we expect auto production to return to a more steady
and sustainable growth of 10% YoY of 2.6mn units in 2013, consisting of 1.5mn units for
domestic car sales (+5% YoY from 1.4mn units in 2012) and 1.2mn units for auto exports
(+17% YoY from 1.0mn units in 2012). With no repeat of the 2012 stimulus program to
spur domestic auto demand, automakers will turn back to emphasis on exports.
SAT is top pick with the best story. Stocks in the automotive sector have
underperformed the market QTD: -4% for SAT, -7% for STANLY and -10% for AH vs. the
SET’s -1%, and, in our view, this is because there is no new catalyst and all industryspecific
benefits are priced in. In 2013, as the industry gets back to normal, we expect
only stocks with specific positive stories will outperform. We choose SAT as our top pick
in the sector, with the highlights of its story being margin expansion as the ICP2 casting
plant begins to reduce the costs raised by outsourcing. Signs of improvement in ICP2
were seen in 3Q12 when gross margin widened. Of the sector, we expect SAT to deliver
the strongest earnings growth at 23% in 2013.