HondaAtlasCars(Pakistan)Ltd.

Turnaroundonbackofmarginandvolumetricgrowth
TuesdayNovember19,2013

BUY
TargetPriceJun14:PKR49 CurrentPrice:PKR42
Bloomberg Reuters MCAP(USDmn) 12MADT(USDmn.) SharesOutstanding HCAR.PA HATC.KA 56 0.1 143

Volume growth lifting the company to profitability: The volumetric growth will be the key factor behind 9% CAGR revenue growth in 20132018E. The company in the past five years has operated below its breakeven level of 17,500 units resultantly posting losses. However the volumes have now started to show impressive growth, withMY13registeringsalesof18,876units(up66%YoY) Margin expansion; unlocking earnings: HCARs margins have witnessed a massive turnaround (500bps higher than MY12 margins of 0.3%) on account of volumetric growthandpriceincreases.BettermarketpositionofHACRhasenabledthecompany to pass on the cost pressure to the consumers. Moreover, the volumetric increase in the years to come (from 7% in 2013 to 6% in 2014) would decrease the overheads as a percentage of sales, further supporting margins. As a result we expect the margins tosettleat7%and6.7%forMY14andMY15respectively AProactivestrategypayingoff:Thecompanyinthepasthasbeenafollowerwhenit comes to launching new generation cars. However the companys strategy seems to have changed now where it has moved ahead of all competitors in launching new generation models. Resultantly, the market share of HCAR in the 1300+cc segment increasedto28%from17%inMY13 CRZ a new opening: HCAR yet again will be moving one step ahead of its competitorsbylaunchingahybridcar,CRZ,atanexpectedpricetagof~PKR3mnas comparedto~PKR4mnexpectedpriceofINDUforitsPRIUS.Thisintroductionwould complement HCARs product portfolio in diversifying their mix of products thereby supportingbottomline Easing Off foreign currency payables: HCAR has consistently been managing ~31% (USD70mn as of MY13) as outstanding payables in foreign currency from the total foreign purchases during the year as a result of cash flow difficulties due to losses in the past years. With an average 3yr profit growth of 6%, the company will look to retire its payables effectively bringing down the negative impact of PKR devaluation onthebottomlinebyPKR0.6/shinMY14 DCF based Mar14TP of PKR48.89/sh: Based on DCF (FCFE) valuation methodology, the Target Price (TP) of the stock is computed at PKR49/sh offering a total return of 17% against current market price thus advocating a BUY stance. At current levels, the stock is trading at PE of 5.71x and 5.31x to our MY14 and MY15 EPS estimates of PKR7.3/shandPKR7.9/shrespectively

Valuations
EPS DPS CapitalGain(%) TotalGain(%) 2013A 1.7 2014F 7.3 2015F 7.9 17% 17%

HCARvs.KSE100RelativeChart
KSE100Index HCAR

380 320 260 200 140 80 Nov12 Dec12 Jan13 Mar13 Feb13 Apr13 May13 Jun13 Jul13 Aug13 Sep13 Oct13 Nov13

HCAR Profile: Honda Atlas Cars Pakistan Limited is a

jointventurebetweenHondaMotorCompanyLimited Japan, and the Atlas Group of Companies, Pakistan. The company was incorporated on November 04, 1992 and joint venture agreement was signed on August 05, 1993, commencing commercial production from July 1994. The company is listed in Karachi, Lahore and Islamabad Stock Exchanges. Its principal activities are assembling and progressive manufacturing and sale of Honda vehicles and spare parts.

FinancialHighlights Units
Revenue GrossMargins MY13A 18,876 30,275 4.78% 525 244 1.7 MY14E 24,233 40,857 6.96% 1,895 1,045 7.3 MY15F 22,300 36,480 6.67% 1,872 1,123 7.9 MY16F 23,634 42,124 6.25% 2,026 1,216 8.5

PBT PAT EPS

Source:BMAResearch

SajjadHussain
sajjad.hussain@bmacapital.com +92111262111Ext:2065

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

InitiatingcoverageonHCARwithaTPof49/shBUY!
With an enticing earning CAGR of 38% in 20132018, we initiate our coverage on Honda Atlas Cars (Pakistan) Limited with a target price of PKR49/sh offering a return of 17%. Strong volumes on account of recently launched models and healthy margins are the key growthdrivers.

Valuation
Forourvaluationpurposes,wehaveusedDCFmethodologytaking10yrPIBrateof13%as theriskfreerate,abetaof1.03andterminalgrowthof3%.Withourearningsestimateof PKR7.3/sh and 7.9/sh for MY14 and MY15 respectively, the stock is currently trading at a forward price to earnings multiple (PER) of 5.71x and 5.31x respectively. This implies that the stock is currently trading at a discount (at 2 year average PE) of 15% when compared to its peers average forward PE of 6.5x. As the company has witnessed a turnaround, the PERofthecompanyistonormalizeinduetime. ValuationSnapshot
PVofFCFE PVofTerminalValue SumofPVofFCFE Cash TotalValueofcompany'sEquity Shareo/s Mar14TP
Source:BMAResearch

1,685 2,955 4,640 2,385 7,025 142.8 49.19

Beta RiskFreeRate MarketRiskPremium

1.03 13% 6%

TheAutoIndustryandHCARspositioninit
Theautomobilesectorisaclearreflectionofthecountryseconomicsituation.InPakistan, the sector has failed to grow as a result of depressive economic situations in the country. The sector recorded a meager CAGR of 1.94% from FY04 to MY13. The demand for cars currently stands at ~133,000 units, with the 1300+cc segment having the largest chunk (46%) of the total demand. Currently, there are three players in the sector locally assembling cars in Pakistan. PSMC has complete monopoly in <1,300cc segment while, in the 1,300+cc segment all three assemblers compete to increase or maintain their market shares. HCARisplacedinthe1300cc+segmentwhichisthelargestandmostcompetitivesegment in the industry. The segment has seen some impressive CAGR of 7.4% with HCAR registeringCAGRof11%fortheperiodMY09MY13.Theprimereasonsforthegrowthare 1) business activity recovery after the financial crash 2) expanding middle class income base and their incomes increase in agricultural income as a result of hike in the support prices of crops (support prices of wheat and sugarcane witnessed a CAGR of 6% and 21% respectivelyfrom20092013). WeexpectthesegmenttogrowbyaCAGRof5%forthenextfiveyearsonthebackof increasingfarmincomebesidestheforecastedGDPgrowthof3.6%and3.25%(Source: worldbankforecast)for2014and2015respectively.

EarningsGrowth;Theturnaroundstorytocontinue
The companys earnings witnessed a turnaround in MY13 after successive losses in the
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

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past4years.Themainreasonsfortheturnaroundwereincreasedvolumesanddecreased cost of raw material in 4QMY13 as a result of a rapid decline in JPY/PKR (on average basis 5.4%YoY). As per our financial model, the revenue of the company is expected to grow at a CAGR of 9% in 20132018E with volumes contributing CAGR 6%, while the rest being the price increase. Consequently, we expect the companys margins to settle at 7% and 6.7% in MY14 and MY15 respectively as compared to 4.8% in MY13. Moving forward, we expect thecompanysmarginstobelessreceptivetoPKRdepreciationasthecompanysposition has strengthened in the segment enabling the company to pass on cost pressures to the buyers(HCARincreasedtheirpricesbyaverage~0.8%w.e.fSep13). Thecompanysstrengtheningpositioninthe1300ccsegment,proactivestrategy, expectedappreciationinthefinancialhealthandtheabovementionedfactorssetthe caseforourBUYstanceonthestock. EPSForecastforMY14EMY18E
PKR

10.0 8.0 6.0 4.0 2.0 0.0 2.0 4.0 6.0 8.0 MY09 MY10 MY11 MY12 MY13 MY14E MY15F MY16F MY17F MY18F

Source:BMAResearch

Volumes
The volumetric growth will be the key factor behind 9% CAGR revenue growth in 2013 2018E. The company in the past five years has operated below its breakeven level of 17,500 units resultantly posting losses. However the volumes have now started to show impressive growth, with MY13 registering sales of 18,876 units (up 66%YoY). To mention, thecompanyhassold12,783carsin1HMY14only.Webelievethemomentuminvolumes will continue on the back of the improving price attractiveness of HCARs products comparedtoINDU,increasingfarmincome,besides(28%YoYincreaseinMY14Evolumes) Volumesversusmargins(MY05MY15F) 35
30 25 20 UnitsSold'000' Margins 10% 8% 6% 4% 2% 0% 2% 4% MY05 MY06 MY07 MY08 MY09 MY10 MY11 MY12 MY13 MY14E MY15F

15 10 5
0

Source:BMAResearch BMA CapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111

This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

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Marginstobethedecisivefactorforearnings
The most important aspect for HCARs profitability is its margins that have witnessed a massive turnaround (5% higher than MY12 margins of 0.3%) on account of volumetric growth and price increases. The company also benefitted from YEN depreciation as ~43% ofitsimportbillisdenominatedinYEN,decreasingtherawmaterialcost. Previously, the margins have either remained negative or too low to cover up other expensesdowntheline.Theexchangerateeffectonrawmaterialcostisanaspecttolook at closely as the margins of the company are very sensitive to movements in exchange rate. To mention, HCAR has exposure in three currencies; USD, YEN and THB. Though the company has benefitted exorbitantly due to JPY depreciation, 47% cost denomination in USD also poses a threat to margins. However, we expect the current market position of HCAR has enabled the company to pass on the cost pressure to the consumers, thus we haveassumednomajordeclineinmargins.Moreoverthevolumetricincreaseintheyears to come (from 7% in 2013 to 6% in 2014) would decrease the overheads as a percentage ofsales,furthersupportingmargins.Asaresultweexpectthemarginstosettleat7%and 6.7%forMY14andMY15respectively. Effectofexchangeratemovementonmargins
Source:BMAResearch

MarginChange
20% 15% 10% 5% 0%

Exgrateeffect

MY04 MY05 MY06 MY07 MY08 MY09 MY10 MY11 MY12 MY13 5%

AProactivestrategypayingoff
The company in the past has been a follower when it comes to launching new generation cars. However the companys strategy seems to have changed now where it has moved ahead of all competitors in launching new generation models. This strategic shift has paid off well for HCAR as the company benefitted greatly by snatching away consumers from competitionasevidentin66%growthinHCARsvolumetricsalesinMY13.Resultantly,the market share of HCAR in the 1300+cc segment increased to 28% from 17% in MY13. On account of the factors mentioned before, we have an optimistic view on the volumetric outlook of HCAR following the expected increase in farm income as a result of ever growing support prices, GSP status to Pakistan and the recovery of buyer sentiment after theeconomicshuffling.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

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MY13:Increasingmarketshare

2013
HCAR 29%

2012

HCAR 17%

INDU 61% PSMC 10%

INDU 72%

PSMC 11%

Source:CompanyReports,BMAResearch

CRZ;anewopening
HCAR yet again will be moving one step ahead of its competitors by launching a hybrid car,CRZ,atanexpectedpricetagofPKR~3mnascomparedtoPKR~4mnexpectedprice of INDU for its PRIUS. The car would be imported as CBUs (completely built units) however being tuned to work on local road conditions. The hybrid introduction was a resultofmotivationgivenbythegovernmentthroughdutyconcessions50%forimportof 12001800cc hybrids. This introduction would complement HCARs product portfolio in diversifying their mix of products thereby supporting bottomline. We have not included the effect of the launch in our estimations as the cars sales performance in the market andcontributionisyettobewitnessedwithnopriorbackground.

Foreigncurrencypayables;togetbetteroff
HCAR has consistently been managing ~31% (USD70mn as of MY13) as outstanding payablesinforeigncurrencyfromthetotalforeignpurchasesduringtheyearasaresultof cash flow difficulties due to losses in the past years. This outstanding exposure increases the expense of the company in terms of exchange losses. As the companys profitability is expected to get better in the coming years (3 yr average growth of 6%), companys cash flows would improve resulting in lower foreign outstanding exposure. Thus, the company will look to retire its payables effectively bringing down the negative impact of PKR devaluationonthebottomlinebyPKR0.6/shinMY14. SensitivityofUSD/PKRparitytoexchangelosses
USD/PKR(Rs) EPSimpact
Source:BMAResearch

1 0.46

2 0.92

3 1.37

WouldINDUsnewgenerationCorollalaunchknockoutHCARsales?
INDU is expected to launch its much awaited new generation Corolla model in Jun14. We expectashorttermdecreaseinCitysvolumes(~1,650unitsinMY15to11,800)asaresult of INDUs launch in MY15. Having said, we expect the decline in sales to normalize in MY16 to 12,508 City units. Furthermore, HCARs products are offered at a discount of 3% to INDUs product which gives HCAR the price competitiveness, besides the technology andfeaturesenhancementgainedbythenewmodellaunches.Thereforeinthelongterm
BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

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we expect the company to maintain its market share at an average 34% from MY14E MY18E.

Riskstoourinvestmentthesis Exchangeratevolatility;amajorrisk
Though the company has respectable pricing power, the company cannot unilaterally increase prices as the competitors actions have to be taken into consideration. As a result unfavorable pricing policy of competitors and PKR depreciation beyond our expectation would have serious consequences on our estimates. The PKR situation for the last month has remained comforting with the rate being range bound at PKR107/USD. Thus we have assumed an average rate of PKR108.5/USD in 4QMY14 and historical 5% USD/PKR depreciationtocontinueinthelongrun.

AIDP;thesinglegreatestuncertainty
The government in the past has shown support to the automotive industry to promote progressive manufacturing, and industrial development in the country. However the recent change of policy regarding import of old cars in the previous year has aroused suspicionamongtheplayersintheindustryastowhattheupcomingpolicywouldcontain. Besides the competition commissions recommendations, in their analysis of the industry, illustrate an effort to promote free market which is detrimental to the local car manufacturers. Thus the above mentioned factors pose a serious threat to our estimates andcouldturnouttobegamechanger.

LaunchofCorolla
Any above than expected decline in Honda Citys volume on account of the new Corolla modelremainsadownsiderisktoourvolumetricassumption.

BMACapitalManagementLtd.801Unitower,I.I.ChundrigarRoad,Karachi,74000,PakistanForfurtherqueries,pleasecontact: bmaresearch@bmacapital.comorcallUAN:111262111 This memorandum is produced by BMA Capital Management Limited and is only for the use of their clients. While the information contained herein is from sources believed reliable, we do not represent that it is accurate or complete and should not be relied upon as such. Opinions expressedmayberevisedatanytime.Thismemorandumisforinformationonlyandisnotanoffertobuyorsell,orsolicitationofanyoffertobuy orsellthesecuritiesmentioned.

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