Thai Stanley Electric

Thai Stanley Electric Plc (STANLY)
Investment thesis
Although STANLY will report a weak 3Q14 (Oct-Dec 2013), due to lower industry-wide auto production, its operation will improve next year, driven by: 1) orders for new models by Toyota, Honda and Nissan and 2) rising capacity utilization at the new factory (Lamp#7) in late FY14. Besides, the stock trades at low PERs of 11x for FY14 and 9.7x for FY15 (significantly below its peak of 14.4x in 2004). Our BUY rating stands.
FY14 sales will be flat
Management conservatively anticipates FY14 (April 2013-March 2014) that sales will be flat YoY. Although the delivery deadline for vehicles ordered under the in govt’s first-time car buyer tax rebate scheme was June 2013, STANLY has won new orders from big carmakers—from Isuzu for new Isuzu Mute X, from Toyota for new the Vios, from Mitsubishi for the Attrage, from Nissan for the Pulsa and from Honda for the Zoomer X and Dream. Our model is in line with management guidance for flat YoY sales in FY14.
Improved capacity utilization rate
Apart from the new factory, Lamp#7, STANLY‘s plants are operating at utilization rates exceeding 70%. Even Lamp#7’s run rate has increased from 40% in FY13 to about 50% currently. Management guides that the new factory’s utilization rate will rise to 90-100% by late March 2014. STANLY should achieve a gross margin exceeding 20% for FY14 (down from 22.4% in FY13, due to the absence of the first-time car buyer scheme for the final three quarters of its financial year).
Further capacity expansion of 5-10% in FY14
The firm has set an FY14 CAPEX budget of Bt1.7bn (lower than last year’s investment of Bt2bn) for a new production line, which will expand capacity by 5-10% in order to cater to rising demand from major clients, Honda, Nissan, Yamaha and Toyota. The investment will be financed entirely by internal cash flows, according to STANLY. Note that at end-September 2013, the firm had cash on-hand of Bt2bn.
Looking to move offshore
Management said that calendar-year 2014 auto production is likely to rise only modestly YoY. Thus, the firm is looking to open new operations in other markets through JVs with Thai Stanley Electric Japan and indigenous auto parts makers in Cambodia and Laos. Note that Thai Stanley already has equity stakes in manufacturing plants in Vietnam, Laos and Indonesia and the combined revenue contributions of these holdings (by way of dividend payments) comprise roughly 10% of its annual net profit. New offshore investments would diversify country risk further. We are confident about STANLY’s prospects for expansion with the advent of the AEC in 2015.