Danareksa Astra International Keep driving

BUY, TP of Rp50,000
Buoyed by strong domestic consumption demand, ASII’s shares have tripled over the past one year. Car sales have been robust - and so have motorcycles – thanks in part to record-low interest rates. Recovery in commodity prices is also helping, though they are still far from 2008’s peak. While there are some risks - chiefly the possibility that the government sets higher auto taxes, impacts to margins will be minimum. Our forecast for car and motorcycle sales growth is a healthy 11.2-13.3% this year. This assumes no increases in taxes. If there are, our car sales forecast will be cut by 200-300bps. Our SOTP-derived TP of Rp50,000 implies 16.0-14.6x FY10-11E PER. As this represents potential upside of 19.3% from the current share price, we place a BUY on the stock.

Auto sales growth to slow, but ASII’s market share will remain intact
Auto sales were very strong in 1Q10, supported by record low interest rates which have helped drive auto sales since many auto purchases are made on credit. Going forward, higher expected economic growth shall continue to support auto sales but hikes in auto taxes - if implemented – would potentially curtail growth. Encouragingly, ASII has been able to maintain its market share, demonstrating the competitiveness of its products. For two-wheelers, for instance, ASII’s market share has been maintained at 46% over the past 2 years. Besides the introduction of new and innovative products, ASII’s financing division has played a vital role in supporting motorcycles sales growth (note that around 80% of motorcycle sales are financed by finance firms rather than banks). In 1Q10, financing division contributed significantly to ASII’s revenues and EBIT – around 7.4-19.7% respectively.

What would be the impact of higher taxes?
The government is reportedly mulling over the idea of setting higher auto taxes including higher vehicle registration taxes and a progressive tax. Besides this, higher gasoline taxes may also be in the offing. In a nutshell, higher auto taxes – if implemented - would put a dampener on auto sales growth in the coming quarters. Note that when Vietnam hiked VAT and Registration Fees by 50% earlier this year, that country’s auto market saw sales slump 30%. In our estimates, the taxes pose 200-300bps downside risk to our FY10 car and motorcycle sales assumptions. This translates into 1.5-2.2% lower auto earnings. However, in terms of margins, there is little impact. We expect auto’s gross margins to be maintained at 11.8% in 2010 (vs. 11.6% in 2009), supported by the firm rupiah despite higher steel prices.

The commodity-related businesses: strong, but a declining contribution
Despite soaring prices of CPO and coal, ASII’s commodity-related businesses (Astra Agro Lestari and United Tractors) contributed only 53% of ASII’s EBIT in 1Q10 (the lowest level since 1Q07). This owed mainly to lower yields which translated into weaker CPO production (-3.2% yoy). As for ASII’s heavy equipment and mining businesses, they performed admirably in 1Q10 as industry conditions improved further. However, in FY10, we expect the EBIT contribution from ASII’s commodities division to decline to 54% from 56% in FY09 before the company’s expansion programs start to kick in.