TRIS Rating Co., Ltd. has affirmed the company rating of Krungthai Car Rent & Lease PLC (KCAR) at “BBB+” with “stable” outlook. The rating reflects the experience of KCAR’s management team in the car rental business, sustainable market position amidst intensified competition, relatively strong profitability, and efficient management of residual risk as shown by the recurring gains from the sale of leased assets. The rating also takes into consideration the company’s financial liquidity, supported by stable cash flows from rental income generated from its portfolio of long-term leases. However, the rating is constrained by fierce competition and the concentration risk from large-sized customers, despite recent diversification efforts. Additionally, the increasing need for outsourced automobile maintenance services by corporations during the past few years is expected to be constrained by the flood crisis. A potential shortage of automobiles caused by the flood may slow the expansion of the leased vehicle fleet in the short term. The “stable” outlook is based on TRIS Rating’s expectation that KCAR will be able to maintain its market position by retaining its existing major customers and acquiring new accounts, despite an intensely competitive environment. Profitability is expected to be maintained through cost control and gains from the sales of leased assets. The effect of the current flood crisis will be limited in the short term and not significantly affect KCAR’s overall performance.
TRIS Rating reported that KCAR provides both long- and short-term automobile operating leases. In terms of net leased assets, KCAR is the third-largest domestic automobile leasing company, out of the 30 major firms in the TRIS Rating database. After a recapitalization and a listing on the Stock Exchange of Thailand (SET) in late 2005, KCAR’s net leased assets have more than doubled, rising from Bt1,283 million in 2004 to Bt2,977 million in 2009. Net leased assets have held at around Bt3,000 million since 2009. At the end of June 2011, net leased assets were Bt2,885 million. Operating lease income accounted for 95% of total rental revenue and 60% of total income. At the end of 2010, the company had rented 6,568 automobiles, up from 5,597 units in 2009. Nearly all (95%) of automobiles were under operating lease contracts; the remaining units were short-term rentals and replacements.
TRIS Rating said, KCAR’s ability to acquire new accounts and maintain its existing customers has been a major challenge because industry operators have triggered intense price competition. However, rising demand for leasing services has supported KCAR’s efforts to maintain its portfolio. Demand is rising because more companies are recognizing the benefits of automobile operating leases. In addition, the economic recovery, which started in 2010, has opened more opportunities for KCAR to expand its portfolio of leased assets. The portfolio is expanding as expiring contracts are replaced and as KCAR expands its fleet. The current flood crisis is expected to constrain the company’s business in the short term: demand will falter, and new automobiles may be in short supply due to manufacturing and transportation delays. TRIS Rating believes that because KCAR has a more diversified lease portfolio, the effects of the flood crisis will be controllable.
KCAR has a competitive advantage because it is vertically integrated with its related companies. More than 60% of its leased assets have been acquired through authorized car dealers owned by KCAR’s founding shareholders, the Chantarasereekul family. KCAR benefits by getting information about special promotions offered by car manufacturers, which enables the company to acquire new cars at lower cost. In addition to more than 750 outsourced automobile maintenance service centers nationwide, KCAR also has its own automobile maintenance service center, which helps control unnecessary maintenance expenses. After a lease contract expires, KCAR can liquidate all leased assets through its subsidiary, Krungthai Automobile Co., Ltd. (KA). With KA’s experienced management team and certification of used cars under the “Toyota Sure” program, KCAR is able to achieve higher prices than liquidation through traditional auction agents. The company has consistently recorded gains from sales of leased assets. In September 2011, KA opened its second branch on Srinakarin road. KA’s second site is expected to tap and expand its customer base in the eastern area of Bangkok. The profit contribution from sales of used cars will be larger in the future.
TRIS Rating said, KCAR changed its depreciation method in 2011. KCAR now estimates the salvage value at 23% of the initial asset value, instead of assuming zero salvage value as it had in the past. However, the new depreciation method has not affected the company’s financial performance because the useful life of leased assets has been reduced from 6.5 years to five years. Thus, the new yearly depreciation expense for a leased asset during the contract period will be the same as the expense under the old depreciation method, despite the changes in asset life and salvage value. Under the same contract conditions, KCAR’s depreciation expenses are usually higher than other auto lessors. Other lessors set the salvage value at the expected market value at the lease expiration date. KCAR’s gross profit margin from the rental segment fell from 26.7% in 2006 to 19.2% in 2009. The drop was partly due to intense competition, together with the effect of a conservative depreciation policy as the asset portfolio expanded during 2006-2009. The gross margin fell to 16.5% in 2010 but rose to 19.7% for the first half of 2011. The conservative depreciation policy will benefit the company once the lease contracts expire and the leased assets are liquidated, reflecting consecutive gains from the sale of leased assets. Control of operating costs and additional profits from the used car dealer segment have also enhanced the company’s profitability.
In 2010, KCAR reported a net profit of Bt346 million, up 29% from Bt268 million in 2009. Net profit was Bt173 million in the first half of 2011. The net profit margin improved to 18.6% in 2010, from 16.3% in 2009, before decreasing slightly to 17.8% for the first half of 2011. The return on average asset (ROAA) ratio also improved, rising to 9.7% in 2010, from 7.7% in 2009. The ROAA ratio was 9.6% for the first half of 2011. The profitability ratios were considered relatively high when compared with peers. KCAR’s financial liquidity and flexibility are moderate. The company has sufficient liquidity from stable rental income cash flows. In addition, the highly liquid nature of its assets partly mitigates liquidity risk, said TRIS Rating. -- End
Company Rating: Affirmed at BBB+ Rating Outlook: Stable
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