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 the company’s management team in the car rental business, 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 the stable cash flows generated from its portfolio of long-term leases through customer payments of rental fees. However, the rating is constrained by fierce competition and KCAR’s customer concentration risk from large-sized customers, despite its recent diversification efforts. Additionally, a potential shortage of automobiles caused by last year’s flood slowed the expansion of the leased vehicle fleet. 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.
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 2011, net leased assets were Bt2,917 million. Operating lease income accounted for 95% of total rental revenue and 54% of total income. At the end of 2011, the company rented 6,407 automobiles, down from 6,568 units in 2010. The decline came partly due to the shortage of automobiles caused by the effect from the flood. Nearly all (92%) of automobiles were under operating lease contracts; the remaining units were for short-term rentals and replacements.
TRIS Rating said, the ability to acquire new accounts and maintain its existing customers has been a major challenge because competitors 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. Unfortunately, last year’s flood disrupted somewhat KCAR’s expansion plan. KCAR was able to control the effects of the flood crisis on its business, as the company incurred only a few additional expenses. Only 0.8% of the vehicles in KCAR’s rental car portfolio sustained flood damage and needed repairs. At the end of 2011, the ratio of operating lease receivables more than three month s overdue to total operating lease receivables increased from 3.4% to 5.6%. The rise came because one large customer delayed the payment. The delay was due to the problem in technical payment process of the customer, not because of any credit issue. The large customer recently paid the outstanding amounts owed to KCAR.
KCAR has a competitive advantage because it is vertically integrated through a network of 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 the leased assets through its subsidiary, Krungthai Automobile Co., Ltd. (KA). With KA’s experienced management team and the certification of its used cars under the “Toyota Sure” program, KCAR is able to sell the cars at prices higher than the prices obtained from liquidation sales through traditional auction agents. The company has consistently recorded gains from the sales of leased assets.
On 16 September 2011, KA opened its second branch on Srinakarindra road. KA’s second site supports its plan to expand its customer base in the eastern area of Bangkok. Unfortunately, KA had to close its head office on Karnjanapisek road for two and a half months due to the flood. As a result, the revenue from car sales decreased to Bt378 million in 2011 from Bt385 million in 2010. KA plans to open its third branch on Phaholyothin road in December 2012. This new branch will focus on mid-size and higher car classes as well as tap the customer base in the northern Bangkok. The profit contribution from the used car sales business will be larger when all three branches contribute for full year in 2013.
The gross profit margin of KCAR’s rental segment fell from 26.7% in 2006 to 16.5% in 2010. The drop was partly due to intense competition, together with the effect of a conservative depreciation policy during the asset for leases portfolio expanded during 2006-2010. The gross margin rose to 19.1% in 2011 but fell to 18.5% for the first half of 2012. 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. Profitability has also been improved through the control of operating costs and through additional profits from the used car dealer segment.
KCAR recently enjoyed several tax benefits, but the benefits expired in 2010. KCAR received a tax benefit when it was listed on the SET in 2005. KCAR was able to pay a corporate tax rate of 25% for five years. KCAR also received another tax benefit: the tax-exempt of 25% of the money paid for the investment the company benefited in 2006-2010. The expiration of this tax benefit mainly caused the company to report a net profit of Bt325 million, down 6.1% from Bt346 million in 2010. Net profit improved to Bt213 million in the first half of 2012, a year-on-year (y-o-y) growth of 23.1% from Bt173 million in the same period of 2011. The net profit margin declined to 17.0% in 2011, from 18.6% in 2010, before increasing to 19.8% for the first half of 2012. The return on average asset (ROAA) ratio also declined, decreasing to 9.0% in 2011, from 9.7% in 2010. The ROAA ratio rose to 11.6% (annualized) for the first half of 2012. KCAR’s 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
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