TRIS Rating has affirmed the company rating of Krungthai Car Rent & Lease PLC (KCAR) at “BBB+” with “stable” outlook. The rating reflects the company’s experienced management team and the competitive advantage from a full range of its complementary businesses. The rating also takes into consideration the company’s adequate liquidity. KCAR’s liquidity is supported by the stable cash flows from its portfolio of long-term leases, with customers paying their monthly rental fees. However, the rating is moderated by intense competition and a prolonged weak economy. These factors continue to be constraints on KCAR’s profitability and expansion plans.
The “stable” outlook is based on TRIS Rating’s expectation that KCAR will sustain its business and financial profile. The company is expected to retain its major customers and acquire new accounts, despite intense competition.
The credit rating could be revised upward if KCAR can improve its market position and continuously improve its financial performance. On the contrary, the rating could be negatively impacted should there be any factor which would cause a significant deterioration of KCAR’s business and financial profile such as weakening market position, narrower rental gross margin, and significant deterioration in financial performance.
KCAR provides both long- and short-term automobile operating leases. KCAR has maintained its net leased assets at around Bt3,000 million for eight years since 2009 due to KCAR’s decision to implement a conservative strategy to avoid price competition. In addition, aggressive expansions of other lessors caused KCAR to slip down the ranking of 30 major companies in TRIS Rating’s database, from the fourth-largest in 2009 to the sixth-largest in 2015. Price competition in the auto operating lease segment has been fierce, especially for large fleet contracts. KCAR’s strategy is to emphasize its service quality to retain its customers and emphasize good performances instead of expanding the size of net leased assets.
At the end of June 2016, KCAR’s net leased assets stood at Bt2,864 million, slightly decreasing from Bt3,097 million at the end of 2015. At the end of June 2016, the company had rented 6,787 automobiles, down slightly from 6,967 units in 2015. About 95% 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 early and accurate information about special promotions offered by car manufacturers. KCAR can then acquire new cars at lower costs. In addition to more than 800 outsourced automobile maintenance service centers nationwide, KCAR 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 rate of 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 was abruptly supplanted by demand for new cars, causing the prices of used cars to drop drastically. Auto manufacturers 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 pricing and depreciation policies helped KCAR retain 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 to 9% in 2015. Used car prices bottomed out in 2014 and gradually recovered, especially after a new structure of excise tax based on emission rates of carbon dioxide effective on 1 January 2016, resulting in higher prices of new cars.
In 2015, KCAR’s reported that its net profit slightly dropped to Bt203 million, from Bt214 million in 2014, as gains on sales of asset were yet to return to the normal level. For the first six months of 2016, KCAR’s net profit was Bt134 million, up 49% compared with Bt90 million in the same period of the previous year. The return on average assets (ROAA) stood at 5.4% in 2015, down from 6% in 2014, but up to 7.7% (annualized) for the first six months of 2016. KCAR’s profitability ratios are higher than its peers. However, intense price competition is still a pressure on the company’s profitability.
KCAR’s financial liquidity and 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 risks.
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