Mandiri Sekuritas ASII: Challenges should not be overlooked

Astra continues to distance itself from other blue-chip companies, with 1Q10 earnings growth of 61%yoy, in-line with market expectations. Obviously, a beneficiary of strong domestic demand and low interest rate environment with its diverse business platforms, there remains potential obstacles such as various tax changes on vehicles that could curb growth. Our TP remains unchanged at Rp50,500/share for the stock that! now trad es at PER10F of 15.7x.

Business presence in growth sectors. Astra’s car and motorcycle sales represented 31% and 26% of our FY10F targets, with market share of 57% and 45% respectively. We think either 2 things have influenced this pent up demand namely (a) affordable cost of ownership via interest-friendly financing and (b) pre-emptive buying in anticipation of a higher cost of ownership as a result of potential regulatory tax changes on vehicle ownership. With uncertainty on the new tax laws, we are keeping our domestic sales forecasts for 2 and 4 wheelers at a conser! vative 6. 4mn units (+9%yoy) and 600k units (+23%yoy).

Possible stumbling blocks. There are three tax issues to be settled by government namely (a) revised registration tax, (b) multi-ownership tax and (c) regional fuel tax, all of which have not been fully outlined and implemented. The heaviest weight would fall on registration tax, which government plans to double the rate. As a precedent, Toyota’s Johnny Dharmawan mentioned that when imple! mented in Vietnam, demand dropped by 30%. Furthermore, a moderated growth this year is admissable given that the industry’s utilization capacity currently stands at a high 81%, according to Gaikindo, thus the impetus of new capacity investments are needed to support sustained demand growth.

Valuations could be peaking. With those unadressed issues at hand, we are reluctant to put a further premium to our current target price despite low interest rates and a weak US dollar favoring the company. Thus, we maintain buy on the stock at Rp50,500/sahre, which currently trades at PER15.7x, a 9% discount to JCI.