TRIS Rating has assigned the rating of “A-” to the proposed issue of up to Bt500 million in senior partially guaranteed debentures of Group Lease PLC (GL) with “stable” outlook. The new debentures are partially guaranteed by KASIKORNBANK PLC (KBANK). KBANK guarantees to pay 60% of the outstanding of the principle and interest of the proposed debenture issue and up to Bt300 million. KBANK is rated by Standard and Poor’s at “BBB+” with a “stable” outlook (international scale). In addition to the strength of the unconditional and irrevocable guarantee given by KBANK, the issue rating partially reflects GL’s long track record in the motorcycle financing segment, the capability and experience of the management team, its improving market position, plus GL’s relatively strong profitability and solid capitalization. However, intense competition in the motorcycle financing segment, plus the high credit risk profiles of its target customers mitigate the strengths underlying the rating. Two additional issues remain concerns: the ability of GL to sustain its rebound after its business slowed in 2011, and the quality of the recently-expanded loan portfolio. GL’s management team will need more time to prove that it can address these two concerns. The “stable” outlook is based on TRIS Rating’s expectation that GL will be able to maintain its market position and continue to deliver satisfactory performance. Loan quality is expected to be controlled at an acceptable level. In addition, the support GL receives from its major shareholder is expected to continue.
GL was established in 1986 by the Luaengrungsi family to make automobile hire purchase loans. In 1990, the company was acquired by Mr. Khanchai Boonpan and Mr. Anusak Intharaphuvasak. The company then shifted its focus to hire purchase loans for motorcycles. The company’s market position improved in 2005, after it raised Bt120 million in new equity capital through an initial public offering (IPO) and listed on the Stock Exchange of Thailand (SET) in 2004. GL’s shareholding structure changed in 2007. The Asia Partnership Fund (APF), an investment fund from Japan, purchased all the shares held by the major shareholders. After APF bought the shares and made a tender offer to retail shareholders, APF became the major shareholder of GL, owning a 62.4% stake. As of 21 November 2013, APF remained the company’s major shareholder with 65.2%. APF holds its shares through Engine Holdings Asia Ptd., Ltd. (31.7%), A.P.F. Holdings Co., Ltd. (18%), and Six Sis Ltd. (15.5%).
After listing on the SET in 2004, GL’s outstanding loans increased from Bt765 million in 2004 to Bt1,083 million in 2005. The value of the loan portfolio was maintained at Bt1,084 million in 2006 due to the intense competition from new market entrants during 2005 and 2006. GL’s strong foundation helped the company survive. GL continues to deliver satisfactory financial results. In contrast, many new entrants, which employed aggressive strategies to grab market share, incurred substantial losses and left the market. After 2006, GL’s loan portfolio resumed growing, rising to Bt1,558 million in 2007 and Bt2,266 million in 2008. The global economic slowdown in 2008 and 2009 caused the loan portfolio to drop to Bt2,088 million in 2009. The loan portfolio rose substantially to Bt2,638 million when the market recovered in 2010.
In 2011, GL’s significant number of management and operating staff resigned after a change in management structure. In addition, the severe floods in late 2011 constrained the expansion of loan portfolio. As a result, outstanding loans dropped to Bt2,207 million at the end of 2011. In an effort to recover, the major shareholder, plus the remaining management team and staff, hired a new management team which had experience in the motorcycle financing segment. The new team has tried to expand GL’s dealer network and maintain the relationships with GL’s existing dealers. As a result of these efforts, GL improved its market position. Outstanding loans grew to Bt3,306 million at the end of 2012, soaring 49.8% from 2011. The loan portfolio continued to grow, rising to Bt4,719 million at the end of September 2013. In terms of outstanding loans, GL is the third-largest motorcycle financing company, out of the ten major firms in TRIS Rating’s database.
In 2012, the company expanded into Cambodia through its wholly-owned subsidiary, GL Finance PLC (GLF). The company has cooperated with Honda NCX, the sole authorized manufacturer and distributor of Honda motorcycles in Cambodia. At the end of September 2013, the loan portfolio of GLF contributed less than 1% of GL’s consolidated outstanding loans. It will take time to see if the international expansion efforts are successful and if the expansion will help enhance the company’s consolidated performance.
GL’s loan portfolio deteriorated substantially in 2011 due to the effect of the severe floods. The ratio of non-performing loans (NPLs: loans overdue more than three months) to total loans rose from 7.8% in 2010 to 12.4% in 2011. The NPL ratio improved to 5.5% in 2012 after the repayment ability of customers improved. The loan quality was affected by the economic slowdown in 2013, just as with other motorcycle financing firms. The NPL ratio climbed to 8.1% at the end of September 2013. However, TRIS Rating has concerns over the quality of GL loan portfolio because the company has aggressively expanded its loan portfolio during the past few years.
GL’s financial performance improved dramatically in 2012. Net income jumped to Bt357 million in 2012 from Bt215 million in 2011. The improvement was mainly from the significant decrease in GL’s provisioning expenses which caused by the company’s better overall loan quality and a change in provisioning policy. The company has changed the fixed percentage use to determine the allowance for doubtful accounts for each class of loan. As a result, the ratio of provision expenses to average loans fell from 8.5% in 2011 to only 1.6% in 2012. The ratio of the allowance for doubtful accounts to total loans also dropped, sliding to 5.3% in 2012 from 13.2% in 2011. Despite the change in provisioning policy, the improvement of loan quality helped maintain the ratio of the allowance for doubtful accounts to NPLs at 96.8%, nearly the level of 106.8% record in 2011. GL’s financial performance in 2013 has been affected by a deterioration in loan quality and higher losses on repossessed motorcycles. The ratio of provisioning expenses to average loans rose to 8.1% for the first three quarters of 2013 (annualized). The ratio of losses on repossessed motorcycles to average loans increased to 6.2% for the first three quarters of 2013 (annualized) from 5.1% in 2012. As a result, net profit was Bt227 million for the first three quarters of 2013, down 10% from the same period in 2012. The return on average assets (ROAA) dropped to 7.0% for the first three quarters of 2013 (annualized) from 12.3% in 2012. Despite the recent drop, GL’s ROAA is considered high when compared with other firms in the motorcycle financing business. TRIS Rating expects the company to make its underwriting and collection policies more stringent. Tough policies will help improve GL’s loan quality and overall performance.
GL’s financial flexibility has been enhanced after the shareholding structure changed in 2007. The company financed the growth in its loan portfolio with borrowings obtained through the support of its creditworthy major shareholder. Although GL’s borrowings increased from Bt954 million in 2007 to Bt1,772 million in 2012, the ratio of shareholders’ equity to total assets remained strong, due in part to consecutive recapitalizations and strong financial performance. The ratio of shareholders’ equity to total assets dropped to 43% at the end of September 2013, from 45.6% in 2012 and 57.9% in 2011. Despite the fall, the ratio was considered strong enough to support the high risk nature of the motorcycle financing business. TRIS Rating expects the company to maintain a larger capital base than other vehicle financing companies which primarily finance passengers and pick-up trucks. GL’s larger capital base will serve as a cushion to absorb risk because many of GL’s customers have higher credit risk profiles. GL’s customers are more vulnerable to adverse changes in the economy.
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