Morgan Stanley ASII

ASTRA INTERNATIONAL (ASII.JK): HIGH EXPECTATIONS, HARSH REALITY; DOWNGRADE UW What's Changed Rating: Equal-weight to UnderweightWe cut our rating on ASII stock to Underweight, even though we keep our TP unchanged at Rp9,500 per share, as the stock implies 26% downside to the current price. At the TP, ASII would trade at 7.3x 2009e P/E - below its mid- and trough-cycle P/E of 9.6x and 8.0x respectively - which captures: 1) a challenging outlook in Indonesia's auto sales in 2009; and 2) the company's projected 3-yr EPS CAGR of -5.7%. ASII recent stock price strength looks vulnerable. ASII's stock has risen 48% in the past two months on perception of auto sales acceleration in 2009 due to the recent interest rate and fuel price cuts. Lower interest rate levels without financing availability, unfortunately, will not be effective in supporting auto sales, in our view, while fuel price levels have minimal correlation on auto sales in the long run. Our analysis suggests that the market is pricing-in 20-30% decline in 2009 auto sales vs. our expectations of a 30-40% contraction.Catalysts:1) weak 1Q09 auto sales plus pressure on 2W market share
- auto sales volume could surprise on the downside and Yamaha's market share might be consistently ahead of Honda's; 2) FY08 financials reporting at end-Feb. 2009 - we expect strong results, a good opportunity to take profit; and 3)1Q09 financials reporting at end-Apr. 2009 - expect weak earnings and consensus earnings revisions.Risks to our call: 1) easing liquidity in the auto financing market; 2) appreciation of the rupiah with low volatility against the US dollar; 3) tame competition in the 2W market; 4) peaceful and successful completion of the 2009 elections; and 5) sharp appreciation of the commodity prices: coal and crude palm oil.