TRIS Rating has assigned a rating of “BBB+” to the proposed issue of up to Bt1,000 million in senior unsecured debentures of AAPICO Hitech PLC (AH). At the same time, TRIS Rating has affirmed the company rating of AH at “BBB+”. The outlook remains “stable”. The proceeds from the new debentures will be used for investment and the company’s working capital. The ratings reflect AH’s strong business profile as a Tier-1 automotive part manufacturer in Thailand, its good relation with 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 interest bearing 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, Auto Alliance (Thailand) Co., Ltd. (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 December 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 2014, the OEM auto part segment generated around Bt9,100 million in revenue or 62% of AH’s total revenue. The car dealership segment sells Ford and Mitsubishi vehicles in Thailand and Honda vehicles in Malaysia, generating about Bt5,500 million or 38% of total revenue. The AH Group operates in Thailand, China, and Malaysia. AH’s operations in Thailand contribute 65%-70% of total sales, followed by Malaysia (15%-25%) and China (5%).
AH supplies auto parts to many leading automakers in Thailand, such as Isuzu, AAT, Nissan, Toyota, Honda, General Motors, and Mitsubishi. 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 25%-35% 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 8%-10% and 5% of total revenue, respectively. The total production of Isuzu, Ford, Mazda, and Nissan is large and contributes about 30% of vehicle production in Thailand. The large market shares of these core customers mean that AH can grow as demand for both passenger cars and pick-up trucks rise in Thailand and abroad. However, the reliance on these few automakers poses concentration risks for AH.
In 2014, the revenues were Bt15,196 million, a 5.5% year-on-year (y-o-y) drop from Bt16,096 million due to a market slowdown in the automotive industry. The AH’s drop in sales was less than the drop in overall industry. This is due to the revenue growth in the car dealership segment in Malaysia, partially compensating the decline in revenue from the OEM auto part segment in Thailand. AH’s operating profit margin before depreciation and amortization (operating margin) was 8.0% in 2014, slightly dropped from an average of 8.5% during 2009-2013. The decline in margin mainly reflects downturn in the automotive industry and an increase in revenue portion of the car dealership segment which has low profit margin.
AH’s financial leverage is satisfactory. The debt to capitalization ratio improved gradually. The ratio reduced to 40.2% in 2014 from 46.1% in 2013. The company’s cash flow generation deteriorated as evidenced by a decline in funds from operation (FFO) to Bt898 million. However, the liquidity is still adequate as the company cut its debt and reduced capital expenditure in previous year. The FFO to total debt ratio was 23.5%. The earnings before interest, tax, depreciation, and amortization (EBITDA) interest coverage ratio was 6.5 times. These two ratios fell from its high level in 2013 because AH received payment of insurance claims worth Bt902 million in 2013.
TRIS Rating expects that demand should recover gradually in 2015-2016, supported by a better economic environment and political stability. AH’s sales revenues are expected to reach Bt17,000-Bt18,000 million over the next three years. The operating margin is expected to range between 8% and 11%. Its leverage should be maintained at around the current level since the company has no major capital expenditures plan in foreseeable future.
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