Aapico Hitech

Investment thesis

We have a SELL rating on AH for the following reasons: 1) there is downside risk to our new FY14 and FY15 sales projections, 2) the threat of GM squeeze if production drops lower than modeled and 3) delays to the launches of new car models by auto makers. In short, AH’s 3Q-4Q14 earnings outlook is fairly bleak, through no fault of its own (there’s little that can be done when the automotive industry is in a slump). We would like to see some indicators of improving industry-wide automotive sales before we reviewed our rating.

That said, the outlook for 4Q14 is somewhat better—the firm will start supplying new factories being established by Nissan, Mitsubishi, Ford and Isuzu. Furthermore, exports and/or domestic sales could pick up by then.

Downside in FY14 sales remains and recovery will take time

We attended AH’s analyst meeting yesterday. The CEO, Mr Yeap Swee Chuan, said that FY14 sales could possibly drop by 10-15% YoY. The firm assumes nationwide auto production of 2.2m units in 2014 (down 10% YoY) and 2.4m units next year (up 9% YoY). We maintain our FY14 AH sales projection of a 10% YoY drop. Note that its 1H14 sales fell 15% YoY to Bt7.2bn, but Thai auto production plunged 29% YoY to 953k units. The firm’s sales declined much less steeply than the industry because its car dealership business in Malaysia grew well. However, this business has a much slimmer margin than the OEM production division.

Slim GM threatens our FY14 and FY15 earnings forecasts

Mr Yeap said that the FY14 GM target range of 6-7% now looks a challenge. 1H14 GM was only 4.6%. We currently assume GM of 6.1% for both FY14 and FY15 in our model. Thus, there is downside risk to our earnings forecast. AH’s FY14 CAPEX budget is Bt400m, down sharply from Bt734m last year. 

In 1H14, AH’s capacity utilization rate was only 65%, down from 90% in 1H13 (75% for FY13). We expect capacity utilization of 65% in FY14 and 70% next year; the firm’s targets are 65% in FY14 and 75% in FY15.

More orders from Nissan, Mitsubishi and Isuzu in late FY14

AH received new orders from Nissan’s (new Navara pick-up) new factory, Ford and from Mitsubishi (Mirage) for navigation devices. Furthermore, the firm expects bigger orders from Isuzu (which is investing Bt6.5bn in a new factory in order to expand production of the D-Max to 400k units this year from about 330k in 2013). The new orders will add to AH’s revenue streams in late 4Q14 onward, assuming that production commences as currently scheduled.