TRIS Rating affirms the company rating of Mida Leasing PLC (ML) at “BBB-”. The rating reflects ML’s status as a consolidated subsidiary of Mida Assets PLC (MIDA), an electrical home appliance hire purchase lender and real estate developer. The rating takes into consideration ML’s stable earnings and proven track record of financing used autos. The rating also reflects ML’s extensive, nationwide branch network and the strong relationships it has with its business partners. However, these strengths are mitigated by some important factors. ML’s asset quality has deteriorated steadily. Moreover, ML faces intense competition in the auto financing segment. In addition, it has a relatively low competitive advantage, in terms of expensive funding costs, and is in a relatively weak market position, in terms of outstanding loans, compared with major competitors.
KEY RATING CONSIDERATIONS
Proven record of managing the loan portfolio
Since its founding in 2000, ML’s core business, which is considered as one key source of profits, is offering hire purchase loans for used cars that are over five years old. ML calls these cars “third-hand automobiles”. ML earns significantly higher yields from this market segment than its peers earn on making loans for new autos or for autos that are not as old.
During 2010-2015, the size of ML’s loan portfolio barely grew. Total outstanding loans remained steady at Bt2,526 million at the end of 2010 and Bt2,591 million at the end of 2015. Growth resumed in 2016. The amount of outstanding automobile loans grew by 10.3% in 2016 and 9.6% in 2017, to Bt2,859 million and Bt3,132 million, respectively.
As of December 2017, ML’s portfolio of automobile loans consisted of hire-purchase loans (93%) and floor plan loans (7%). The low rate at which the loan portfolio grows, plus a lack of barriers to entry, leave ML in a weak position in the industry. However, ML’s historical performance shows it does have the ability to maintain profitable operations amid difficult circumstances.
Nationwide branch network
As of December 2017, ML owned a headquarters office in Bangkok and 16 branches in select provinces, such as Ubon Ratchathani, Surat Thani, and Nakhon Pathom. The newest branch, in Surin province, opened in 2015. The network of branches covers every region of the country. The locations of the branches are consistent with ML’s policy to penetrate the market in rural areas, where its target customers live. Loans made to customers near the Bangkok head office accounted for 9.8% of total outstanding loans in 2017. The head office originated 8.9% of the new loans made in 2017.
Yield spread widens
Although the size of the loan portfolio has not been growing remarkably, ML’s net interest spread was wider than peers. Despite a slight drop in 2016, the yield on the loan portfolio recovered to 16% in 2017. The net interest spread rose to 11.2%, up from 10.8% in 2016. However, net profit decreased slightly to Bt113 million in 2017, from Bt118 million in 2016. Similarly, the return on average assets (ROAA) fell to 3.2% in 2017, from 3.7% in 2016. The drop in profitability in 2017 resulted from a rise in operating expenses. Also, non-interest income declined in 2017 because ML had no extraordinary gains on securities trading, which it had realized in 2016.
High costs mitigate competitive advantage
Regarding intense competition in auto financing segment, players with cheap funding cost and low operating expenses have competitive advantage. They make a profit by offering low yield loans to customers with acceptable credit risk. Thus, they have more opportunities to expand loan portfolio comprising good quality of assets and paying lower commission expense. In contrast, ML has been expanding its loan portfolio with limited growth, high operating expenses and high exposure to credit risk from offering high yield loans to customers with low credit profiles.
Deteriorating loan quality
ML’s target customers have weaker credit profiles than the customer groups targeted by many other auto hire purchase lenders. As a result, ML’s non-performing loan (NPL) ratio is normally higher than the NPL ratios of its peers.
ML’s NPL ratio oscillated in the range of 2.3% to 3.6% during 2010-2013. ML wrote off some bad debts during the second half of 2014, reducing the NPL ratio to 3.2% at the end of 2014. Despite the write-offs, the NPL ratio continued to deteriorate, climbing to 3.7% at the end of 2015, 4.3% at the end of 2016, and 4.6% at the end of 2017.
ML’s NPL coverage ratio, or the ratio of allowance for doubtful loans to NPLs, averaged approximately 80% during the last five years. A new accounting standard will take effect in 2019. If the new standard means ML needs to reserve higher allowance for doubtful loans, the bottom line could be affected.
No mismatch between assets and liabilities
The proportion of long-term debt to total capital funds has increased since 2016, after ML issued new debentures. At the end of 2017, approximately 88% of ML’s total borrowings were long-term borrowings. ML’s funding structure matches the structure of the hire purchase loan portfolio. The cash inflows ML expects to receive yearly are still much higher than the scheduled debt repayments. The average maturity of the loan portfolio typically ranges from three to five years. However, a lot of debentures mature in 2019, which has resulted in refinancing risk.
ML has a weak market position and no secure sources of funds. In contrast, its major competitors are affiliated with larger financial institutions and have easier access to funds. ML will face a challenge if the loan portfolio expands substantially. TRIS Rating expects ML will get new access to credit. More sources of credit would give ML greater financial flexibility.
Adequate capital base
The proportion of equity in ML’s capital base is greater than that of its competitors. Equity comprises almost 50% of total capital funds, a level considered very strong. Profits and the recent recapitalisations have bolstered shareholders’ equity. The ratio of shareholders’ equity to total assets, as of December 2017, was high at 48.6%, but slightly less than in the past few years.
ML could boost the growth rate of the loan portfolio by using more debt capital to fund an expansion. However, TRIS Rating assumes the company will maintain its strong capital base. A strong capital base serves as a cushion to absorb the risk from ML’s customers. ML’s customers have higher credit risk than other customer groups because they are more vulnerable to adverse changes in the economy.
According to a key financial covenant of its debentures, ML has to maintain a debt to equity ratio below 3 times. The debt to equity ratio at the end of 2017 was 1.1 times. ML was in compliance with the financial covenants. TRIS Rating believes that the company will easily stay in compliance for the medium terms according to its regular growth plan.
RATING OUTLOOK
The “stable” outlook is based on TRIS Rating’s expectation that ML can maintain its market position and financial performance while keeping the capital base strong.
RATING SENSITIVITIES
The credit upside case could arise if ML improves its market position and competitive position while still delivering strong financial results on a sustainable basis. The rating could be revised downward should asset quality deteriorate. A drop in asset quality would substantially affect profitability and the company’s financial profile.
COMPANY OVERVIEW
ML was founded on 4 October 2000 under the name of Star Ranium Auto Leasing Co., Ltd. The company was renamed Mida Leasing Co., Ltd. in 2001, taking the name of its parent company, MIDA. MIDA is still the largest shareholder of ML. As of 31 December 2017, ML’s major shareholders were MIDA and members of the Ieosivikul and Diloksakayavitoon families. These two families are the founders and the major shareholders of MIDA. In addition, more than half of ML’s board members also sit on the board of MIDA or are a top executive at MIDA. This close relationship between ML and MIDA reflects the harmonization of the business policies of the two firms.
ML was listed on the Stock Exchange of Thailand (SET) and became a public company in 2004. Registered capital was Bt90 million when the company was founded. Currently, ML’s paid-up capital is Bt532 million.
ML’s main line of business has always been hire purchase loans for used automobiles. ML finances used automobiles, especially pick-up trucks, and focuses its marketing efforts in provincial areas. Most of ML’s target customers, such as farmers, have incomes at or below the national average. The company has a headquarters office in Bangkok and 16 branches in key provinces in every region of the country.
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