TRIS Rating Affirms Company Rating and Outlook of “KCAR” at “BBB+/Stable”

Stocks News Monday December 15, 2014 17:31 —TRIS News Release

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 its competitive advantage because it has a full range of complementary businesses. The rating also takes into consideration the company’s good liquidity. KCAR’s liquidity is supported by the stable cash flows generated from its portfolio of long-term leases, as customers pay their monthly rental fees. However, the rating is constrained by fierce price competition which has made KCAR lose market share. Additionally, the current slide in used car prices is expected to limit the performance of KCAR’s subsidiary which trades used cars. The “stable” outlook is based on TRIS Rating’s expectation that KCAR will sustain its business profile by improving its market position. The company is expected to retain its major customers and acquire new accounts, despite intense competition. Cost controls and gains from the sales of leased assets will help KCAR maintain its profitability.

KCAR provides both long- and short-term automobile operating leases. 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. Since 2012, KCAR’s market position has dropped as rivals aggressively expanded their loan portfolios. Price competition in the auto operating lease industry has been fierce, especially for large fleet contracts and government projects. KCAR has chosen to abstain from some routine contract bids and not to pursue projects that carry low lease yields. KCAR’s strategy is to emphasize its service quality as a means to retain its existing customers. The company 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 2011 to 2013, sliding from Bt2,917 million at the end of 2011, to Bt2,863 million at the end of 2012, and to Bt2,704 million at the end of 2013. However, its net leased assets slightly increased to Bt2,867 million as of September 2014. Operating lease income accounted for 95% of total rental revenue and 64% of total income. At the end of June 2014, the company had rented 6,471 automobiles, up slightly from 6,255 units in 2013, but down slightly from 6,499 units in 2012. Nearly all (91%) of the rented automobiles were under operating lease contracts; the remaining units were for short-term rentals and for use as replacement vehicles.

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. Vertical integration benefits KCAR in several ways. For example, KCAR can get information about special promotions offered by car manufacturers. KCAR can then 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. By having its own center, KCAR can reduce unnecessary maintenance expenses for its fleet of leased assets. 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. KCAR 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-time 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. Auto manufacturers have implemented aggressive marketing campaigns in an effort to reduce their excess inventories of new cars. KA’s management team put a priority on selling KCAR’s retired vehicles rather than trading used cars. KCAR’s gains from the sales of leased assets were also affected as demand for used cars fell. However, a conservative depreciation policy helped KCAR remain recorded gains from the sales of leased assets, despite realizing lower margins on the sales. KA’s net profit comprised 12%-14% of KCAR’s net profit during 2008-2012. The portion dropped to 3% in 2013 but increased slightly to 6% of KCAR’s net profit for the first half of 2014. KA’s profit portion showed improvement from 6% in the first six months of 2014 to 8% in the first nine months of KCAR’s net profit. KA’s used car trading business is expected to recover to the same level of 2008-2012, after the used car market recovers.

The gross profit margin of KCAR’s rental segment has fallen due to the fierce competition. The gross profit margin slipped from 19.1% in 2011 to 17.1% in 2012 and to 17.2% in 2013. However, the gross profit margin rebounded to 19% for the first nine months of 2014 due to KCAR’s cost control efforts. In 2013, the low prices of used cars pushed KA’s profitability down by 83% from the previous year. KA’s net profit fell from Bt54.4 million in 2012 to Bt9.5 million in 2013. KCAR reported a profit of Bt273 million in 2013 down 32% from the level in 2012. For the first nine months of 2014, net profit dropped to Bt165 million, as a result of falling used car prices and a slowdown in used car trading. KCAR’s net profit was down 23% compared with Bt214 million it earned for the first nine months of 2013. KCAR’s net profit margin slipped from 19.4% in 2012 to 16.3% in 2013 but rebounded to 19.2% for the first nine months of 2014 (annualized). Despite the drop of profitability, KCAR’s profitability ratios were considered relatively high when compared with peers.

KCAR’s financial liquidity and financial flexibility are moderate. The company has sufficient liquidity from stable cash flows it receives from auto lessees. In addition, the highly liquid nature of its assets partly mitigates liquidity risk.

Krungthai Car Rent & Lease PLC (KCAR)
Company Rating: BBB+
Rating Outlook: Stable
TRIS Rating Co., Ltd./www.trisrating.com
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