TRIS Rating has affirmed the company rating and the senior unsecured debenture rating of AAPICO Hitech PLC (AH) at “BBB+” with “stable” outlook. The ratings reflect AH’s strong business profile as a Tier-1 automotive part manufacturer in Thailand, its strong relationships with major automakers, high barriers to entry in the Tier-1 automotive part industry , and strong fundamentals of the automotive production in Thailand. These strengths are partially weighted down by the relatively thin profit margin of its stamped products and car dealership segments, high customer concentration due to the character 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 will be able to maintain its strong market position in its core lines of business. The outlook also reflects TRIS Rating’s expectation that AH will continue to maintain its financial strength. Despite a decline in its profitability, AH’s low debt level is expected to support the company’s liquidity as its fund from operation (FFO) to total debt ratio should continue to be above 20% over the next two or three years.
The rating and/or outlook could be lowered if profitability or leverage significantly deteriorates from the current level. This could be seen from the operating margin that drops below 5% or if the debt to capitalization ratio exceeds 50% for an extended period.
The rating and/or outlook could be revised upward if AH’s profitability improves significantly as a result from the diversification to higher margin products. These could be evidenced by the operating margin increasing to 15% on a sustained basis.
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 March 2015, 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: original equipment manufacturer (OEM) auto parts and car dealership segment. The company’s main OEM products are chassis frames and stamped parts. The car dealership segment sells Ford and Mitsubishi vehicles in Thailand and Honda vehicles in Malaysia. In 2014, AH’s sales totaled approximately Bt14.5 billion. The revenue from OEM auto part segment accounts for 65% of total revenue, while the dealership constitutes the rest. AH’s operations in Thailand contribute 65%-70% of total sales, followed by Malaysia (15%-25%) and China (5%).
AH is a supplier of parts to many leading automakers in Thailand. The company’s major customers are Isuzu, Auto Alliance (AAT; Ford and Mazda Joint venture), Ford, Nissan, Toyota, Honda, General Motors and Mitsubishi. AH’s tier-1 position is protected by high barriers to entry, such as large and ongoing requirement for capital investments, a good track record of operation, and ongoing efficiency improvement required by automakers. AH’s main customer is Isuzu, contributing about 30% of total revenue. Two other major customers, AAT and Nissan, contribute about 9% and 5% of total revenue, respectively. The production of these major customers for brands of Isuzu, Ford, Mazda, and Nissan, take account of about 30% of vehicle production in Thailand. The large market shares of AH’s customers mean that AH can grow as demand for vehicles rises in Thailand and abroad.
However, the company’s business strengths are partially offset by the low profit margins from its stamped parts and the car dealership segment and customer concentration risk as it relies on few customers.
In the first quarter of 2015, AH’s total revenue was up by 1.8% year on year (y-o-y) to Bt3,758 million due to a gradual recovery of the automotive industry in Thailand and revenue growth from the car dealership segment in Malaysia. At the same time, AH’s operating profit margin before depreciation and amortization (operating margin) was 7.6%, down from an average of 8.8% during 2010-2014. The decline in the margin mainly reflects lower utilization rate of OEM auto parts segment and an increasing portion of the car dealership segment which generates low profit margin. AH’s financial profile is satisfactory due to debt reduction and other cost-cutting efforts. The debt to capitalization ratio has improved, falling from 40.2% in 2014 and 38.7% in the first quarter or 2015. Its FFO to total debt ratio above 20% indicates acceptable level in TRIS Rating’s assessment.
TRIS Rating anticipates that demand for vehicles should recover gradually in 2016-2017, mainly backed by positive prospect of vehicle exports and the ECO-car project which is expected to start production during 2016-2017. TRIS Rating’s base-case scenario expects that AH’s sales revenues will grow by 4%-5% annually over the next two or three years. The operating margin should rebound to the historical average of 8%-9% as a revenue portion of OEM auto part segment rises. Its debt to capitalization ratio is expected to improve continuously since the company has no major capital expenditures. Therefore, the debt to capitalization ratio is expected to fall to 30% and FFO to total debt ratio should boost to 30%-40% over the next few years.
AH’s liquidity is adequate. The company’s estimated FFO over the next 12 months would be Bt1 billion and AH also has unused credit facilities of Bt3 billion. The main uses of fund over the next 12 months are the planned capital expenditures of about Bt400 million, dividend payments of about Bt100 million, and long-term debt repayments of Bt1.2 billion.
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