TRIS Rating has assigned the company rating of AAPICO Hitech PLC (AH) at “BBB+” with “stable” outlook. The rating reflects AH’s strong business profile as a Tier-1 automotive part manufacturer in Thailand, its good relation with several major automakers, high barriers to entry in the Tier-1 automotive part industry, and strong fundamentals in Thailand for automotive production. These strengths are partially offset by the relatively thin profit margin of its stamped products, high customer concentration due to nature of industry which has small number of major automakers in Thailand, and cyclical nature of the automotive industry.
The “stable” outlook reflects TRIS Rating’s expectation that AH’s strong market position in its core lines of business and recovery of the automotive industry will support the company’s earnings over the next 12 months. The outlook also reflects our view that AH can maintain its financial strength. Due to its relatively low profit margin, the company is expected to keep its debt to total capitalization ratio lower than 50%, or the debt to equity ratio should remain below 1 times. The rating or outlook could be revised upward if profitability improves significantly as a result of diversification to higher margin products. The rating could be lowered if profitability or leverage significantly deteriorates from the current level for an extended period. If AH continuously loses the bidding of orders from its major customers such as Isuzu, AAT, and Nissan or if AH incurs a new, large, debt-funded capital expenditure, these would have a negative impact on its profitability and leverage.
AH is a large manufacturer of automotive parts in Thailand. The company was established in 1996 and was listed on the Stock Exchange of Thailand (SET) in 2002. As of June 2014, the company’s two main shareholders were the Yeap family and Sojitz Corporation (Sojitz), holding about 39.8% and 15.8% of the total shares, respectively.
AH’s business profile is relatively solid. The company has two core lines of business: OEM (original equipment manufacturer) auto parts and car dealership. The OEM auto part segment can be divided into five categories: chassis frames, stamped or pressed parts, forged and machined parts, plastic parts, and jigs and dies. In 2013, the OEM auto part segment generated around Bt11,000 million in revenue or 69% of AH’s total revenue. The car dealership segment sells Ford and Mitsubishi vehicles in Thailand and Honda vehicles in Malaysia, generating about Bt4,600 million or 28% of total revenue. The AH Group operates in Thailand, China, and Malaysia. AH’s operations in Thailand contribute 70%-80% of total sales, followed by Malaysia (15%-20%) and China (5%).
AH’s main customer is Isuzu Motors (Thailand) Co., Ltd. The company has been the main supplier of chassis frames for Isuzu’s pick-up trucks since 2003. Revenue from Isuzu was about Bt5,100 million in 2013 or 33% of total revenue. Other major customers are Auto Alliance (Thailand) Co., Ltd. (AAT), a joint venture between Ford Motor Company and Mazda Motor Corporation, and Nissan Motor (Thailand) Co., Ltd. AAT and Nissan generates about 10% and 8% of total revenue, respectively. In 2013, Isuzu, Ford, Mazda, and Nissan produced around 761,000 vehicles, accounting for 31% of total vehicle production in Thailand. The large market shares of these main customers mean that AH can grow as demand for both passenger cars and pick-up trucks rise in Thailand and abroad. However, the heavy reliance on these few automakers poses concentration risks for AH.
AH’s revenue has grown steadily, tracking growth in the automotive industry. The company’s sales soared in 2012 after the government launched the “first-car buyer” tax refund scheme. The company’s sales leapt by 55.8% to Bt16,811 million in 2012, before declining to Bt16,096 million in 2013, falling by 4.3%. For the first half of 2014, the revenue was Bt7,560 million, a 13.4% year-over-year (y-o-y) drop. The drop was caused by a market slowdown in the automotive sector due to the ended effect of the government’s first-car buyer policy and political turmoil which affected the whole industry.
AH’s profit margin is fairly low but rather stable. AH’s operating profit margin before depreciation and amortization (operating margin) averaged 8.5% of total sales during 2009-2013. In the first half of 2014, AH could maintain its operating margin at 8.5% despite a tumble in the automotive industry.
AH’s leverage ratio improved gradually after the debt to capitalization ratio reached a peak of 55.2% in 2011. The ratio peaked due to the capacity expansion and the replacement of damaged machines during the severe flood in 2011. As of June 2014, the debt to total capitalization ratio declined to 43.6%. In the first six months of 2014, the funds from operation (FFO) to total debt ratio was 41.1% (annualized with trailing 12 months). The earnings before interest, tax, depreciation and amortization (EBITDA) interest coverage ratio was 6.8 times. These two ratios were relatively higher than in 2012 because AH received payment of insurance claims worth Bt900 million in 2013.
Despite the recent contraction in the automotive industry, TRIS Rating expects that demand will recover gradually in 2015, supported by a better economic environment and political stability. Over the next three years, TRIS Rating expects that AH’s sales revenue will grow at 5%-7% per annum, reaching Bt18,000-Bt19,000 million. The operating margin is expected to range between 8% and 11%. The leverage ratio should fall below 30% within the next three years, based on the assumption that the company will have no major capital expenditures. AH’s liquidity should improve since its total debts are expected to decline further, while its FFO is expected to range between Bt1,500-Bt2,000 million per annum.
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