P.C.S. Machine Group Holding

Investment thesis

We attended PCSGH’s analyst meeting yesterday, which was hosted by the CEO, Mr Prasong Adulratananukul. Management expects the operation to improve in 4Q14 onward and guides for upside from business diversification from pick-up trucks into passenger cars. PCSGH expects to win orders to build power train parts for eco-car models next year. We maintain our BUY call, premised on: 1) the fattest GM of the Automotive stocks we cover, 2) a high ROE (despite a net-cash position) and 3) scope for upside from business diversification into parts for passenger cars.

Operation will start recovering in 4Q14, driven by sales

PCSGH expects 4Q14 auto production to rise 10% QoQ, driven by aggressive promotions (the Motorshow, November 29) and stronger exports. As such, the firm believes its 4Q14 sales will also rise at least 10% QoQ, enabling GM to recover to 23-25% on greater economies-of-scale. Thus, we maintain our GM assumptions at 21.5% for FY14 and 28% for FY15. 

Business diversification into parts for passenger cars

Up till now, PCSGH has mostly supplied power train system parts to diesel-engined pick-ups. Management plans to diversify to parts for gasoline-engined vehicles, especially passenger cars. The firm expects orders for passenger cars to comprise 25% of sales within three years, up from only 2-3% currently. Note that The Board of Investment awarded Phase II licenses for eco-car production to five carmakers—Ford-Mazda, Toyota, Mitsubishi, General Motors and Nissan. The total promoted eco-car production capacity of the five car makers is about one million units/year.

Plan for a solar rooftop

Mr Prasong said the firm plans to invest for Bt180m in a solar rooftop project in FY15. It aims to have a total of 3MW of generating capacity installed. The power will be sold to the Provincial Electricity Authority. The plan is waiting on the Energy Regulatory Commission to grant a Power Purchase Agreement (PPA). We haven’t yet plugged this venture into our model; we will do so when the PPA is approved.

Well managed CAPEX with debt free

PCSGH’s CAPEX budgets are Bt420m for FY14 and Bt580m for FY15 following Bt570m last year. All CAPEX will be financed by internal cash flows. Note that the firm had cash in-hand of Bt500m at end-September and was debt-free.