RHB Indonesia Morning Cuppa - 20 December 2016 - (Astra International)

Good morning,

Astra International - LTV Policy Relaxation To Rev Up Sales Even More

The Government’s decision to lower the LTV threshold for vehicle financing would boost Astra’s vehicle sales growth, on top of other factors like cutting the BI rate and improved consumer spending. Astra’s 11M16 market shares for4W and 2W vehicles have grown, and we think it is likely the biggest beneficiary of the recovery in national vehicle sales. Maintain BUY, with an unchanged DCF-based IDR9,250 TP (22% upside) that also reflects 19x FY17F P/E. Key risks to our call include rising competition in the car market, especially in the MPV segment.

¨ Indonesian Government relaxes the policy on LTV threshold. The Financial Services Authority (OJK) has issued new policies that have lowered the loan-to-value (LTV) threshold for vehicle financing, for multifinance companies. Thus, LTV rates are now at 5-20% (vs 20-30% previously). We believe that a more relaxed policy would likely trigger a recovery in national vehicles (at a wholesale level), which have either been flat or declined in the last three years.

¨ Lower financing costs should boost 4W and 2W wholesales. Our economists expect Bank Indonesia (BI) to reduce its benchmark rate in early 2017. Hence, we expect vehicle financing interest rates to decrease, in line with the anticipated cut in the BI rate. The rate itself has declined by 150 bps YTD (to 4.75% in November, from 6.25% in January). There is a time lag, which can last anywhere from three to nine months, between the decrease of the benchmark rate and the decline in vehicle financing costs.

¨ Higher coal and CPO prices boosting income outside Java. Our channel checks with United Tractors (UNTR IJ, BUY, TP: IDR26,300), Indonesia’s largest heavy equipment distributor, suggested that coal contractors have ordered more heavy equipment to increase their production capacity. Hence, more jobs would be created. In addition, higher CPO prices would also boost disposable income.We have seen a recovery in monthly sales since August, in line with the uptrend in commodity (ie coal and CPO) prices.

¨ However, expect rising competition in the 4W vehicle segment. Competition in the car market, especially multi-purpose vehicles (MPV) is likely to increase. New players in the 7-seater MPV space, GM Wuling and Mitsubishi, aim to launch their models by end-2017 to compete head-to-head with existing models such as Toyota’s Avanza, Daihatsu’s Xenia, as well as Honda’s BRV and Mobilio. However, it would take time for these new players, especially GM Wuling, to penetrate the domestic car market since the company needs to set up its after-sales services infrastructure for its products.

¨ Astra likely be the winner. Despite the rising competition, we believe that Astra would be able to manage these challenges and emerge a winner, since the company is the biggest beneficiary of the recovery in wholesale vehicles. This is due to its extensive distribution network, strong after-sales services and robust brand names. In 11M16, its 4W and 2W vehicles market shares increased to 55% (from 50%) and 74% (from 69%) respectively. Maintain BUY, with aDCF-based IDR9,250 TP implying 19x FY17F P/E. (Andrey Wijaya)

Link to report: to be sent our later

Link to Daily report: Indonesia Morning Cuppa - 201216