Somboon Advance Technology

Somboon Advance Technology Plc (SAT)

Investment thesis
We expect SAT to deliver its weakest HoH and YoY sales performance for 1H14, due to the slump in demand for cars that followed the end of the first-time car buyer tax rebate scheme (June 2013) and prevailing weak consumer spending. Also, capacity expansion for new Mitsubishi and Kubota models may push up some production costs. SAT currently trades at an FY14 PER of 9.2x (close its long-term mean of 9.4x). Although we think the worst has probably passed, there are as yet no forward indicators of a recovery in demand for cars. Our SELL rating stands. Within Automotive space, we currently prefer STANLY and PCSGH.
Reiterate FY14 operation to drop in line with poor car production
Management guides that 1H14 sales will be weak, but will recover in 2H14. SAT guides for an FY14 sales decline of 5% YoY, then 5% growth in FY15. Domestic new car sales are expected to dive to 1m units in 2014 from 1.34m units last year—the post-party hangover from the first-time car buyer scheme has truly set in. Household indebtedness has surged and consumer spending has sunk. Hence, SAT has shifted its production focus to agricultural vehicles for Kubota (tractors—from 64k units in 2013 to 80k units in 2014). In line with SAT’s guidance, we assume an FY14 sales drop of 5% YoY and growth of 5% in FY15 (but our numbers may be subject to downgrades, given the lack of evidence of recovery so far).     
Capacity expansion in 2H14 will push up costs
In 2H13, SAT expanded the output capacity of its product champions—axle shafts (by 25-30%) and stabilizer bars (by 20%). The two products together comprised 45% of FY13 sales. SAT expects an overall FY14 capacity utilization rate of 70-75%, down from 87% last year. The firm’s FY14 CAPEX budget is now Bt513m, downsized from Bt1bn after it scrapped plans for a JV plant in Indonesia.
GM likely to be squeezed by diminished production scale
FY14 GM may decline if sales volume were to be lower than expected. SAT’s FY14 targets are 17% for GM and 9-10% for net margin. We currently assume FY14 GM of 16.9% and NM of 9.8% in our model.
Expect the worst 2Q14 net profit in the year
We estimate SAT’s 2Q14 profit of Bt123m, down by 27% QoQ (due, at least in part, to numerous public holidays during April) and 17% YoY (we assume that sales fell 18% YoY). Our 2Q14 model assumes that revenue fell 12% QoQ to Bt1.9bn and core profit dived 23% YoY to Bt105m. Note that industry-wide 2Q14 auto production dived by 33% YoY and 16% QoQ to 435k units.