CLSA Astra International Rp52,750 - BUY 1H10 Result

Astra Intl net profit of Rp6.44tn (+53% yoy) is inline with our forecast and accounts for 53% of our full year expectation. Quarter on quarter net profit increase of 14% is driven by high profitability of its affiliates (including Astra Honda) as operating profit of consolidated subsidiaries only up by 5% qoq. No change in our earnings and recommendation. Astra Int is not cheap on valuation basis, either on historical as well as compared to market valuation. However, strong fund flow continue to serve as tailwind as it is a preffered exposure to Indonesia given it operates at the right/growing sector, strong balance sheet, and perceived good corporate governance.

Strong recovery in profitability of Astra Honda
We have argued that Astra Honda profitability will recover despite the market share pressure (Astra International, Less cyclical, 2 March 2010). This has continued to play out in 2Q10 with operating profit per unit increase further from Rp1.27m to Rp1.3m, a five years high. Note that Astra Intl owns 50% stakes in Astra Honda and does not consolidate it in its profit and loss statement (captured in equity in net income account).

Margin pressure in automotive division
Operating margin in automotive division decline from 3.8% in 1Q10 to 3.1% in 2Q10 due to higher promotion and time lag in cost increase as input price rises. Therefore, although car sales were up by 10% qoq and 71% yoy in 2Q10, profit of automotive division down by 4% yoy and down 11% qoq. Total profit of automotive division for the six months of 2010 were up 13% yoy, behind the 71% growth in automotive sales and 43% growth in car sales. Note that the yoy comparison is also distorted by the positive impact of inventory gain last year when car price were raised during the crisis (rupiah weaken sharply) and Astra was still selling down old priced inventory..

Strong momentum in financial services division
Profit of financial services division continue to gain momentum as strong car and motorcycle sales translated into strong loan growth (+29% yoy, +8% qoq). In addition lower costs of fund also helps as selling rate adjustment tend to fall slower than cost of fund. NPL remain very healthy at less than 1% in car financing and less than 2% in motorcycle financing.

United Tractors result is relatively in line, weaker 1H10 is expected due to wet weather that slows down Pama works. UT’s net profit of Rp1.89tn accounts for 47% of our forecast and we remain confident that it will meet our full year forecast.

Astra Agro weak result. Astra Agro reported a net profit of Rp636bn in 1H10 represents 33% of our full year forecast which is 17% below market consensus. The result looks weak on yoy basis (-17% yoy) due to lower production and higher costs, but qoq recovery is substantial (+34% qoq) as production pick up in 2Q10 (albeit at lower pace than last year). Given the seasonally higher production in 2H and our expectation of higher CPO price, Astra Agro should deliver a much higher profit in 2H10.