TRIS Rating 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 and the efficient management of residual risk as shown by the recurring gains from the sale of leased assets despite the current negative sentiment in the used car market. 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 as customers pay their rental fees. However, the rating is constrained by fierce price competition which keeps downward pressure on profitability. Additionally, KCAR remains exposed to customer concentration risk from large-sized customers, despite its continued efforts to diversify. The current downward trend in used car prices is expected to limit the performance of its subsidiary with used car trading business. 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.
KCAR provides both long- and short-term automobile operating leases. 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. In terms of net leased assets, from 2009 through 2011, KCAR was the third-largest domestic automobile leasing company, out of the 30 major firms in TRIS Rating's database. In 2012, KCAR's market position dropped to the fifth rank due to aggressive portfolio expansion efforts of peers. Price competition in the auto operating lease industry has been fierce, particularly competition for large fleet contracts and bidding for government projects. KCAR has chosen to neither participate in some routine contract bids nor pursue projects that carry low lease yields. The company has a strategy to emphasize its service quality to retain its existing customers. KCAR is searching for customers in new markets who value good service and are willing to pay for it. KCAR's net leased assets dropped continuously from Bt2,917 million at the end of 2011, to Bt2,863 million at the end of 2012, and to Bt2,757 million at the end of June 2013. Operating lease income accounted for 95% of total rental revenue and 50% of total income. At the end of 2012, the company had rented 6,499 automobiles, up slightly from 6,408 units in 2011. Nearly all (90%) of automobiles were under operating lease contracts; the remaining units were for short-term rentals and replacements.
KCAR has a competitive advantage because it is vertically integrated through a network of related companies. More than 50% 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 800 outsourced automobile maintenance service centers nationwide, KCAR also has its own automobile maintenance service center. Its center helps reduce 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.
KA's used car trading business has been affected by the government's recent first-car buyer program. Demand for used cars has been abruptly supplanted by demand for new cars, causing the prices of used cars to drop drastically. This situation is expected to last through the end of this year. Auto manufacturers have implemented aggressive marketing campaigns in an effort to reduce excess inventories of new cars. KA's management team decided to put a prioritization as well as exerted more effort to sell KCAR's retired vehicles than its used car trades. KCAR's gains from the sales of leased assets were also affected as demand fell for used cars. However, a conservative depreciation policy helped KCAR remain recorded gains from the sales of leased assets, despite lower margins. KA's net profit comprised 12%-14% of KCAR's net profit during 2008-2012. However, the portion dropped to 5% of KCAR's net profit for the first half of 2013. KA's used car trading business is expected to resume next year, after the used car market recovers.
?Due to intense competition, the gross profit margin of KCAR's rental segment fell from 19.1% in 2011 to 16.6% for the first half of 2013. In 2012, KCAR reported earnings before tax of Bt523 million, up 15% from the level in 2011. Profitability improved through the control of operating costs and through additional profits from the used car trading segment. Net profit increased by 22% from Bt325 million in 2011 to Bt397 million in 2012. The improvement was partly due to the drop in the income tax rate from 30% in 2011 to 23% in 2012. In the first half of 2013, as a result of falling used car prices and slowdown in the used car trading business, net profit dropped to Bt159 million, down 26% from Bt216 million for the same period of the previous year. KCAR's net profit margin slipped from 19.2% in 2012 to 17.4% for the first half of 2013 (annualized). Despite the drop, 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.
Company Rating: BBB+ Rating Outlook: Stable TRIS Rating Co., Ltd./www.trisrating.com Contact: santaya@trisrating.com, Tel: 0-2231-3011 ext 500/Silom Complex Building, 24th Floor, 191 Silom Road, Bangkok 10500, Thailand ? Copyright 2013, TRIS Rating Co., Ltd. All rights reserved. Any unauthorized use, disclosure, copying, republication, further transmission, dissemination, redistribution or storing for subsequent use for any purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, of the credit rating reports or information is prohibited. The credit rating is not a statement of fact or a recommendation to buy, sell or hold any debt instruments. It is an expression of opinion regarding credit risks for that instrument or particular company. The opinion expressed in the credit rating does not represent investment or other advice and should therefore not be construed as such. Any rating and information contained in any report written or published by TRIS Rating has been prepared without taking into account any recipient's particular financial needs, circumstances, knowledge and objectives. Therefore, a recipient should assess the appropriateness of such information before making an investment decision based on this information. Information used for the rating has been obtained by TRIS Rating from the company and other sources believed to be reliable. Therefore, TRIS Rating does not guarantee the accuracy, adequacy, or completeness of any such information and will accept no liability for any loss or damage arising from any inaccuracy, inadequacy or incompleteness. Also, TRIS Rating is not responsible for any errors or omissions, the result obtained from, or any actions taken in reliance upon such information. All methodologies used can be found at http://www.trisrating.com/en/rating_information/rating_criteria.html.