JS Securities Limited – Morning Briefing

Karachi, April 15, 2019 (PPI-OT): PAPS 2019 provides a teaser of changing times in the auto industry

We present a brief overview on the Pakistan Auto Parts Show (PAPS 2019) which was held between April 12-14, where over 230 exhibitors showcased their products.

Pak Suzuki (PSMC) unveiled their 660cc Alto model, which will replace the outgoing Suzuki Mehran. Given that the automatic variant of the Alto will be the economic option apart from Chinese alternatives, demand for the Alto could be strong upon its launch.

Kia Lucky Motors (KLM) stole the show as they unveiled a host of models at PAPS, including the 1,000cc Picanto (hatchback) and the 2,000cc Sportage (SUV). All signs from their presentation at the event suggest that the company is geared up to compete for a slice of the local auto demand.

Master Motors, with its Chinese partner Changan, introduced four models, three of which will be launched in December, including two minivans and one SUV.

PAPS 2019 gives a taste of new entrants in Pak auto space

In this report, we present a brief overview on the recently concluded Pakistan Auto Parts Show (PAPS 2019), which was held during April 12 to 14, where over 230 exhibitors (120 local and 100 international) showcased their products for local customers and businesses. Other than various renowned auto parts and engineering goods manufacturers, a number of auto assemblers were also present at the event, where some new car models to be launched were also revealed. Our key takeaways on PAPS 2019 from the perspective of auto assemblers are as below.

Pak Suzuki Motor Company (PSMC) finally unveiled the 660cc Suzuki Alto, which will replace the 800cc Suzuki Mehran in the company’s line up of locally assembled cars. News reports suggest the Alto will be available with manual and automatic transmissions. Although the company has not revealed pricing of the new Alto variants, news sources are indicating a price range of Rs0.9mn to Rs1.2mn (exclusive of WHT). Given the perceived superiority of Japanese brands over Chinese (such as United Bravo), robust demand for the new Alto is expected. Another reason to expect strong demand for Alto would be that it would be one of the most economic cars (other than the 800cc Prince Pearl expected later this year) with automatic transmission, which would attract demand from commercial customers for online taxi apps such as Uber. Booking for Alto is expected to start by May or June.

Quite clearly, Kia Lucky Motors (KLM) was the standout performer during PAPS 2019 among assemblers, introducing a range of vehicles including the Kia Picanto (1,000cc hatchback), Kia Sportage (1,000cc SUV), Kia Niro (1,600cc crossover hybrid), Kia Grand Carnival (3,300cc minivan) and their flagship model Kia Stinger (3,300cc sedan). The company appears to be coming forth with an aggressive strategy to cater to the local market, which was evident from its marketing campaign, including test drives of the Sportage, which will be the first Kia car to be assembled by KLM in Pakistan (expected from August). This will be followed by the Picanto, which will be available from October this year.

Given that the company will be starting with the Sportage and Picanto in its first year, i.e. 2,000cc and 1,000cc models; there is a possibility that another model might be introduced next year to fill the gap within these engine displacement levels. Like PSMC, KLM also refrained from revealing their pricing strategies for the two model launches. However, the market’s price expectations for the Picanto are Rs1.4mn–Rs1.6mn at current exchange rate levels, i.e. it would be priced lower than its closest competitor, the Suzuki Cultus, whereas it offers much better features in comparison to the Suzuki Wagon-R. KLM has a plant capacity of 50k units per annum on double shift basis.

Among other OEMs, Honda Atlas Cars (HCAR) displayed the facelift versions of the Honda Civic 1,800cc and the resumed version of the 1,500cc Civic Turbo at the event. In addition, Master Motors, with its Chinese partner, Changan is launching 3 new cars for local assembly with a plant capacity of 30,000 units (single shift), including two minivans of 1,000cc capacity and one SUV.

Finally, a discussion with representatives of Millat Tractors (MTL) indicates a possibility that the company might be focusing more on exports in the future, given weaker demand in the local market. At the same time, there are expectations of the tractor segment improving if an agricultural package or any other incentives are announced for the sector. Moreover, Bolan Castings (BCL) which has a highly concentrated customer mix (most of its sales are to its parent, MTL), is planning to diversify its customer base in the coming period, where there are initial talks in process with one new auto assembler.

The final verdict for the industry

These are exciting times for the Pakistani auto industry, particularly from a customer or spectator’s point of view. For local (existing) OEMs though, these are challenging times, to say the least. Incoming capacity from new entrants (including Kia, Hyundai, Renault, and Chinese assemblers) could roughly double the existing capacity of the auto industry within the next three to five years, i.e. from existing ~270k units to over 0.5mn units per annum.

Considering the current economic slowdown, rising interest rates, etc., there might be an intense struggle for market shares in coming years, increased advertising expenditures and price wars might also be on the cards. One thing seems certain though – the auto industry has changed permanently and the days of arbitrary price increases might be behind us. Hence, the Japanese automakers might find it very hard to replicate the earnings growth seen in the 2014-18 business cycle.

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