Danareksa Gajah Tunggal Positive Margins Surprise

Maintain BUY, TP upped to Rp2,080
We maintain our BUY recommendation on GJTL with the TP raised to Rp 2,080, implying 9.2x-7.7x 10F-11F PE. Our 10F-11F earnings estimates are raised 34%-33% respectively on the back of higher-than-expected gross margins in 1H10 and our belief that the company can maintain this higher gross margin going forward. The sales outlook is bright, with increasing orders coming from Michelin. Also, the company’s expansion plans will help it to meet the increasing demand. The stock is currently trading at an attractive valuation of 10F-11F PE of 6.1x-5.1x. BUY maintained.

The 2Q10 gross margin beats our expectations
The 1H10 results are above our expectations. The gross margin expanded to 21.3% in 2Q10 from 19.9% in 1Q10 thanks to a higher portion of ultra high performance tires in the total revenues. As a result, the 1H10 gross profits were 59% of our full year forecast. As for operating expenses, the 1H10 operating expenses were 45% of our full year forecast. However, this is still in line with our forecast (note that the first half operating expenses were around 46% of the full year operating expenses over the last 5 years on average). Net gearing also improved. It fell to 109% at end-June 2010 from 121% at end-2009.

The rubber price continued to decline
The rubber price continued to decline. By the end of July 2010, the Bangkok RSS 3 rubber price had fallen to US$ 3.2/kg, or 21% off its peak in late-April 2010. As natural rubber accounted for around 27% of the production costs, the pressures on gross margins should ease in the second half of the year. Our sensitivity analysis shows that for every 5% decline in the natural rubber price, the gross margin should increase by around 110 bps (ceteris paribus).

We upgrade our gross margin estimates
We upgrade our 2010-11 gross margin estimates to 20.8% - 20.9% respectively from 17.9%-18.1% previously. To arrive at our new 2010 gross margin estimate, we incorporate the 1H10 gross margin into our forecast and assume 2.5% higher ASP in 2H10 (compared to 1H10’s ASP) and that the natural rubber price in 2H10 is 8.3% higher than in 1H10 (this takes into account the 67 days time-lag in inventory). At the same time, we also raise our 2010 sales volume estimate for the radial, bias and motorcycle tires to 10.2 mn, 4.1 mn, and 19.7 mn, respectively, and lower our 2010 ASP estimates for radial, bias and motorcycle tires by 13.5%, 1.6%, and 4.6% respectively. All in all, there is little change in our total 2010 revenues estimate.