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 parts manufacturer in Thailand, strong relationships with major automakers, improved capital structure, high barriers to entry, and the strong fundamentals of the automotive industry in Thailand. These strengths are partially offset by the thin profit margin of the company’s stamped products and car dealership segments, high customer concentration due to the 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 maintain its strong market positions in its core lines of business and maintain its financial profile at an acceptable level.
The ratings and/or outlook could be lowered if profitability or leverage deteriorates significantly 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 ratings and/or outlook could be revised upward if AH’s profitability improves significantly, probably due to 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 2016, the company’s two main shareholders were the Yeap family and Sojitz Corporation (Sojitz), holding 39.9% and 15.8% of the outstanding shares, respectively.
AH’s business profile is solid. The company has two core lines of business: the original equipment manufacturer (OEM) auto parts segment and the 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. Revenue from the OEM auto parts segment accounts for 60%-70% of total revenue annually, while the car dealership segment constitutes the rest. AH’s operations in Thailand contribute 70%-80% of total revenue, followed by operations in Malaysia (15%-25%) and China (3%-5%).
AH is a supplier of parts to many leading automakers in Thailand. The company’s customers are Isuzu, Auto Alliance (AAT; Ford and Mazda joint venture), Ford, Nissan, Toyota, Honda, General Motors, Mitsubishi, and others. AH’s Tier-1 position is protected by high barriers to entry, such as large and ongoing requirements for capital investments, a good track record of operation, and the ongoing efficiency improvement required by automakers. AH’s main customer is Isuzu, contributing about 29% of total revenue. Two other major customers, AAT and Nissan, contribute about 11% and 6% of total revenue, respectively. Vehicle brands produced by Isuzu, Ford, Mazda, and Nissan account for about 30% of the vehicles produced 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 the stamped parts segment and the car dealership segment, and customer concentration risk as it relies on few customers.
AH’s revenue totaled Bt15 billion in 2015, a slight decline from Bt15.2 billion in 2014. Revenue from the car dealership segment fell by 5.4% year-on-year (y-o-y) due to the depreciation in the Malaysian ringgit versus Thai baht. However, revenue from the OEM auto parts segment grew slightly by 2.8% y-o-y, mainly due to more orders from major customers. Revenue in the first quarter of 2016 was up by 4% y-o-y to Bt3.9 billion. Revenue from the OEM auto parts segment remained the key driver, rising by 8.5% y-o-y. Isuzu, Ford, and Mazda reported higher domestic sales volumes in the first five month of 2016. Sales volumes rose by 4.6% y-o-y for Isuzu, 22.2% y-o-y for Ford, and 28.6% y-o-y for Mazda, driven by increasing demand for new models, such as Isuzu D-Max and Ford Everest, and robust demand for some current models, such as Mazda 2 and Ford Ranger. As a result, revenue from the OEM auto parts segment rose. In contrast, revenue from the car dealership segment fell by 3.6% y-o-y in the first quarter of 2016, pressured by the weaker Malaysian ringgit. Revenue is expected to grow steadily over the next three years, rising to about Bt16 billion in 2018. The strong demand for AH’s OEM products will bolster revenue, despite the current slowdown in the automotive industry. Ford’s new plant, with a production capacity of 150,000 units per annum, should help push AH’s revenue higher once Ford ramps capacity up.
AH’s financial profile is satisfactory, mainly because of recent debt reduction and cost-cutting efforts. The operating profit margin before depreciation and amortization (operating margin) rose to 8.9% in the first quarter of 2016, from 7.6% in 2015. The recovery in the margin reflected cost-cutting efforts in the OEM auto parts segment and a change in business mix. The car dealership segment, carrying a low profit margin, comprised a smaller portion of revenue. The operating margin is expected to stay at 8%-10% over the next three years.
AH’s capital structure has improved recently. The debt to capitalization ratio declined steadily from 55.3% in 2011 to 33.1% at the end of March 2016. AH’s tightening capital expenditure control reduced capital requirements. The debt to total capitalization ratio should decline further, staying below 30% during 2017-2018, as the company has no major capital expenditures planned. AH’s “TURBO” plan, aiming at doubling revenue to Bt30 billion by 2020, is not expected to require any major capital expenditures. Maintenance capital expenditures are expected to be Bt400-Bt500 million per annum over the next three years. Even if AH has major capital expenditures or an extra investment, the company is expected to maintain the debt to capitalization ratio below 50%.
Cash flow protection is adequate. The fund from operation (FFO) to total debt ratio above 20% is an acceptable level in TRIS Rating’s assessment. The FFO to total debt ratio increased to 34.6% (annualized, based on the trailing 12 months) in the first quarter of 2016, from 28.5% in 2015, as profitability increased and leverage fell. The EBITDA (earnings before interest, taxes, depreciation, and amortization) interest coverage ratio rose to 10.6 times in the first quarter of 2016, from 7.5 times in 2015. TRIS Rating expects the FFO to total debt ratio will rise to 35%-45%, while the EBITDA interest coverage ratio will stay above 8 times over the next three years. The FFO, forecasted at Bt1.1-Bt1.3 billion per annum, will be almost sufficient to cover the debt coming due in the next 12 months of each fiscal year plus the planned capital expenditures for the year. Debt repayments plus capital expenditures will total Bt1-Bt1.5 billion per annum. AH had cash and marketable securities of about Bt300 million and unused revolving credit facilities of about Bt3 billion as of March 2016 as other sources of funds.
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