Robust demand for trucks (ASII IJ, O-PF, TP: Rp75,000)

A surge in domestic business activities and FDI had resulted in a stronger demand for commercial vehicles than passenger cars. Astra (ASII IJ) and Indomobil (IMAS IJ) are key listed beneficiaries given their strong presence in this segment. Tightening on funding is a key risk, but we think Indo economy is more resilient now than before. Astra’s share price has corrected, now at 24% disc to NAV, 11.9x PE12. Astra remains a blue-chip stock and one of the largest consumer proxies in the region.

Robust commercial vehicles sales
􀂉A surge in business activities and FDI had resulted in a strong demand for commercial vehicles (33% of 4W demand), which grew 21% YoY in 8M11 to 193,019 units. This was faster than the 11% YoY growth in passenger cars’ sales.
􀂉Demand is domestic-driven, where net-exports only at 10% of the market.
􀂉Our forecast is 10-11% pa growth for total car demand, but we believe the upside will come from the FDIs, and rising income & middle class with low car penetration.

Key beneficiaries: Astra (ASII IJ) and Indomobil (IMAS IJ)
􀂉Three players control 95% of the market: Krama Yudha (Non-listed distributor of Mitsubishi) with 42% share; Astra with 30.5% share from selling Toyota, Daihatsu, UD Trucks, & Isuzu; and IMAS with 23% share from selling Hino, Suzuki, & Nissan.
􀂉Most brands are expanding production capacity; currently at high utilization rate.
Risks and opportunities
􀂉Tightening on funding due to global financial crisis is a key risk given auto purchases and working capital of finance companies are mostly through financing.
􀂉There is ample forex reserves however (US$124bn as of Aug2011) to defend the currency, hence risk of a shock of imported inflation is benign. The likelihood of a massive drop in business confidence is also low given the resilient economy.
􀂉Astra and IMAS have low forex exposure with healthy balance sheet.
􀂉Lower tariff structures, and more infra. development provide growth opportunities.

Astra remains a good proxy
􀂉Astra share price has corrected 24% from peak, now at 24% discount to its NAV, and 11.9x PE12 and 10.5x PE13. It even trades at discount to IMAS.
􀂉Many auto-related plays in Indo but most are too small and illiquid. We also advise investors to stick to bluechip names like Astra. Astra remains one of the largest consumer proxies in the region with strong presence in major sectors in Indonesia.
􀂉Astra has also proven to be reslient in the past, with ROA rebounded swiftly post every crisis. Buy on weakness.

Robust commercial vehicles sales
Commercial vehicles sales grew a strong 21% YoY in 8M11 to 193,019 units in Indonesia. The growth was faster than the passenger cars which grew 11% YoY, and the total Indo 4W sales which grew 14.4% YoY.
Demand driven by a surge in business activities. As can be seen in figure 2, commercial vehicles sales growth had been stronger than passenger cars since last year, supported by a strong economic growth. This is despite the components shortage that happened in the 2Q this year. On average, commercial vehicles made up about 30% of the 4W market
historically, although in 8M11, this proportion rose to 33%.

“Commercial vehicles” are classified by Gaikindo’s (Indo Car Association) into three types: buses, pick ups & trucks and double cabin 4x2/4x4, each categorized by Gross Vehicle Weight (GVW). It excludes vehicles classified under heavy equipment such as dump truck. In the truck segment, 84% is light truck, and the remaining is medium to heavy truck.

Domestic-driven demand
Auto demand in Indonesia is domestically driven, where net-export accounts for only ~10% of the market. Imports are mostly in the sedan and luxury segments.

Recovery in business activities can be seen in:
􀂉Surge in FDI. FDI in 1H11 reached US$10bn already, while it was US$13.2bn for FY10. Recent multinationals stepping up investment include Nestle, L’Oreal, P&G, Hankook Tires, Anhui Conch, Sumitomo Machinery and Siam Cement.
We expect FDI to increase in the next few years given many foreign companies have announced investment such as auto companies announcing capacity expansion in Indonesia. The latest being Toyota to invest US$385m in expanding capacity, and Sumitomo Machinery to invest up to US$100m for its first plant in Indonesia.
􀂉Strong heavy equipment sales, after a slump in 2009. Komatsu, which has 50% market share reported a +55% YoY 8M11 sales to 5,650 units. 66% goes to mining, 16% to agribusiness, 10% to construction and 7% to forestry.
􀂉Strong industrial land sales in Greater Jakarta. In 2010, total industrial land sales almost tripled YoY to 381ha. But in 1H11, total sales had reached 508ha! Property companies that have exposure to industrial estate development such as Lippo Cikarang (LPCK IJ) and
Jababeka (KIJA IJ) are reaping the benefit. Overall, commercial vehicles demand is driven by economy growth. BI’s latest real GDP projection calls for 6.6% growth for 2011 and
6.5% for 2012. If this growth rate is achieved, it will be the third highest in Asia after China and India, reflecting Indonesia’s resilience to the global downturn.
Gaikindo expects commercial vehicles sales to grow 17% in FY11 and 11% in FY12. This is higher than its forecast for passenger cars growth at 5-10% pa.
Our forecast is 10-11% pa growth for total car demand. The upside will come from surge in FDIs, rising income with low car penetration, etc. (Please refer to our “The road to US$50bn’’ report in July2011 for more details). Greatest risk is liquidity tightening on funding given auto purchases are still mostly done through financing. However, we believe risk is
lower than in 2009. We explore this further in section 3. Rising FDI will also offset the portfolio outflows in current volatile market and support the balance of payments.

Key beneficiaries: Astra and Indomobil
In the commercial vehicles space, as can be seen in Figure 10, Mitsubishi dominates the market with 42% market share in 8M11. Second place goes to Suzuki with 15%, followed by Daihatsu 12.9% and Toyota 8.8%. 95% of the market is dominated by three sole-distributors:
􀂉Krama Yudha Tiga Berlian Motors (Non-listed), which leads the market with 42% market share from distributing Mitsubishi brand.

Astra (ASII IJ, O-PF, TP: Rp75,000), which has 30.5% market share from distributing Toyota, Daihatsu, UD Trucks and Isuzu brands. 19% of Astra’s car sales are commercial vehicles. (page 1 to 4 only)

Source: CLSA dated 27 September 2011