Somboon Advance Technology

Investment thesis

The automotive industry should recover YoY—the worst of the post-first time-car buyer scheme collapse in sales is now behind us. SAT is expected to deliver better HoH numbers, led by a capacity utilization increase to 80% (from 75% in 1H14). Furthermore, the firm will receive new orders from Hino and Kubota next year. We forecast FY15 sales growth of 10% YoY to Bt8.8bn after a projected 11% YoY decline to Bt8bn in FY14. Our model indicates FY14 earnings of Bt614m, down 37% YoY, then a 42% bounce in FY15 to Bt870m. The stock currently trades at an FY15 PER of 9.0x, somewhat below its long-term mean of 9.8x. Our BUY rating stands.

Gradual recovery in 2H14 and a 10% rise in sales next year

Management maintains its FY14 sales contraction guidance of about 10%, which is much shallower than the scale of the dive for the industry as a whole. SAT assumes 2014 nationwide auto production of 2.0m units (down 18% YoY). Thus, it has diversified production into parts for big trucks for Hino (to export) and agricultural vehicles for Kubota (tractors—from 64k units in 2013 to 72-80k units in 2014 and 85k units in 2015). The firm also expects FY15 sales to rise 10% YoY. We forecast an FY14 sales drop of 11% YoY, then an FY15 sales rise of 10% YoY, in line with management guidance.

Capacity utilization will rise gradually

SAT is building a new production line that will make parts for big trucks and new orders for Kubota and Mitsubishi for which revenue is slated to start flowing in 4Q14. Thus, its capacity utilization will rise next year in tandem with sales expansion of 10%. Note that the firm’s capacity utilization rate was 83% in 1Q14, 73% in 2Q14 and 79% in 3Q14. SAT expects its 4Q14 run rate to exceed 80% on rising orders, as noted above. Note that its FY13 capacity utilization rate was high at 90%. 

GM and net margin will expand in 2H14 onward

Following poor GM of 17.6% and net margin of 7.4% in 1H14, the firm guides for HoH margin improvements in 2H14, driven by higher sales and efficiency improvements. We conservatively assume GM of 17% and NM of 7.7% in FY14, following 17.5% and 10.8%, respectively, last year. Our model points to FY15 GM of 17.7% and net margin of 9.9%.

3Q14 earnings to post QoQ recovery

We estimate SAT’s 3Q14 profit at Bt144m, up 12% QoQ (but down 15% YoY), due to higher QoQ working hours. Our 3Q14 model assumes that sales rose 8% QoQ (but slipped 6% YoY) to Bt2bn, in tandem with increased 3Q14 auto production of 435k units (up 5% QoQ).