AKD Securities Limited Equity Research – Daily Report

Karachi, December 14, 2017 (PPI-OT): Autos: “Go out with the old and in with the new”

Prevailing competitive dynamics in the auto space can be said to be nascent at best. Taking cues from past offerings of now defunct OEMs (KIA, Hyundai, Nissan), we construct a case for why new entrants are expected to penetrate the passenger car market. Highlighting the minimal impact these offerings made in the past (largely from idiosyncratic factors hindering proper production runs), we compare their performance to older variants offered by incumbent OEMs (FX, Baleno, Liana, etc.). Lastly, looking at the average life of variants offered by incumbents (INDU, HCAR, PSMC) the stretched production life of PSMC’s offerings remains unsustainable in the face of emerging threats from new entrants, in our view. Comparing local model launches with the international release of variants by incumbents we emphasize the shortening of the product life cycle for local OEMs as an unavoidable trend for local OEMs.

Old variants were a mixed bunch: Looking back at the last two decades we take cues from the performance of obsolete/defunct OEM variants. Focusing on offerings by KIA, Hyundai (by DFML) and Nissan (GHNL) we collate performance metrics revealing their impact on industry segmentation against models being offered in the past by current OEMs (FX, Baleno, Liana, etc.).

Why this time is different: Idiosyncratic factors likely limited production runs for these variants which included unworkable debt arrangements by OEMs leading to inability to manage production ramp-ups and concerns over product quality and after sales services. Suffice it to say, their second foray into the domestic auto space is expected to carry more weight, particularly when backed by large conglomerate groups (KIA with LUCK, Hyundai with NML and Renault with Al-Futtaim). Even so, between the two, Hyundai’s Santro offering was able to garner greater support attributed to its mass-market pricing, low displacement compact design, elucidating key-opportunities advice for the upcoming entrants.

What incumbents are doing: Amongst the incumbents, in the passenger car segment we highlight the low average life of a model (counting facelifts, model upgrades and new variants) with premium segment OEMs, INDU and HCAR being at the forefront of upgrading their offerings regularly. The laggard in this aspect remains PSMC where variants on offer remain decades old, a trend we highlight as being unsustainable in the face of emerging threat from new entrants. Charts (on previous page) present FY17 market share in industry, passenger vehicles and SUVs segment.

Investment Perspective: Comparing local model launches with the international release of these variants, we emphasize the shortening of the product life cycle for local OEMs based on improved designs, additional features offered by their primary parts suppliers globally. HCAR and INDU remain at the forefront of this development, where these factors can be seen as positive catalysts for driving demand for their variants. In the case of PSMC we can see the significant lag (still in the decades) between rolling out of models globally and at home. INDU remains highly competitive on all dynamics discussed, consistently with up-grading variants (upcoming debotteneck activity, launch of new 3.0D Fortuner variant) keeping us steadfast on our TP of PkR2,069/sh which offers a 24.4% upside from current levels, BUY.

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