Thai Stanley Electric

Thai Stanley Electric Plc (STANLY)

Investment thesis

We reiterate our BUY rating on STANLY, premised on: 1) earnings growth of 23% in FY14 (April 2013-March 2014), driven by production expansion for new car models by Toyota, Honda and Nissan, 2) rising capacity utilization at the new factory (Lamp#7) in FY14, 3) a debt-free financial position and 4) low PERs of 10.3x for FY14 and 9.3x for FY15 (significantly below its last peak PER of 14.4x in 2004).    
STANLY’s sales growth target for FY14 is higher than our forecast
Management anticipates FY14 sales growth of 10-15%, roughly in line with automotive production this year. Although the first-time car buyer tax rebate scheme expired in December 2012, the car delivery period was extended to June 2013. Furthermore, STANLY has won new orders from big carmakers, namely Toyota, Honda and Nissan. We, however, conservatively assume more modest FY14 sales growth of 6%.
Rising economies-of-scale = fatter margins
Excluding the new factory (Lamp#7), STANLY‘s plants are running at utilization rates of above 90%. But even Lamp#7’s run rate has increased from 40% in FY13 to 70% currently and its defect rate has dived to 2% from 40% last year. Management guides that Lamp#7’s utilization rate will rise to 90-100% within six or seven months. That should push up STANLY’s gross margin from 22% in FY13 to 23% in FY14, its pre-4Q11 flooding level. Given rising capacity utilization, we project net margins of 16.6% in FY14, up from 14.3% in FY13 (April 2012-March 2013).
Further capacity expansion of 5-10% in FY14
Management has set an FY14 CAPEX budget of Bt1.7bn (lower than last year’s investment of Bt2bn) for a new production line in FY14, which will expand production by 5-10% in order to cater to rising demand among major clients, Honda, Nissan, Yamaha and Toyota. The new investment will be financed entirely by internal cash flows, according to STANLY. Note that the firm currently has net cash in-hand of Bt1.7bn.  
Baht appreciation a potential threat to sales
STANLY said it hasn’t yet been impacted by baht appreciation. But management views that if the baht were to strengthen further, it could negatively impact on Thai car exports and on STANLY’s export sales of automotive lamps to carmakers in Japan and the US. This is one of the reasons the firm set an FY14 sales growth target of only 10-15% following 45% expansion last year. So far this year, the baht has gained about 10% against the US dollar and about 30% against the yen. A stronger baht could prompt offshore automakers to start ordering lamps from countries that haven’t seen such steep currency appreciation, such as Indonesia, Vietnam and India.