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Honda Atlas: 4QMY21 review: Earnings miss on lower-than-expected gross margins

  • HCAR announced a 4QMY21 NPAT of PKR896mn (EPS: PKR6.27), lower than our expected EPS of PKR6.73, and a DPS of PKR4.52
  • Gross margins declined by 1.3ppt qoq, likely due to the surge in shipping freights and international commodity prices
  • We have a Buy rating on HCAR with March 2022 TP of PKR365/sh, where the launch of the new City is a key trigger

HCAR reported a NPAT of PKR896mn (EPS: PKR6.27) for 4QMY21, vs. a net loss of PKR28mn (LPS: PKR0.2) SPLY. This is a weak result from HCAR, despite higher volumes (up 29% qoq). The result takes MY21 earnings to PKR1.8bn (EPS: PKR12.56), up a staggering 2.6x yoy (albeit from a low base). HCAR also announced a final DPS of PKR4.52, higher than our expectation of PKR4.00.

The 4Q result clocked in slightly below our expected EPS of PKR6.73, largely due to significantly lower-than-expected gross margins and higher distribution costs.

Key highlights

  • Revenue of c.PKR23bn, up 29% qoq, due to an equivalent sequential rise in unit sales (up 45% yoy). It is largely in line with our estimates. The rise in qoq volumes may be due to the imminent phasing out of the existing City model and rise in auto-financing sales, in our view.

  • Gross margins at c.5.2% came in lower than our expectation of c.7.1%, which is likely due to a rise in both shipping freights (sea and air shipments), as well as the surge in international commodity prices, in our view. The phasing out of the present City model for the newer generation (likely to be the 6th generation), may have led to a rise in costs as well (test trials and the need for sufficient inventory of parts). GMs thus declined by a sharp 1.3ppt qoq (and down c.0.4ppt yoy). The PKR/US$ appreciation of c.5% qoq, however, would have cushioned margins somewhat.

  • Financial charges clocked in at a negative PKR24mn; we await the annual accounts for clarity on this item. Other income rose by c.70% qoq, likely due to the robust influx of customer advances amid long lead times, in our view. As per channel checks, the delivery time for HCAR is roughly three months at present.

  • Distribution expenses rose by a sharp c.4x qoq, potentially due to higher marketing costs and rise in sales. Admin expenses, however, rose by 34% qoq. The ETR clocked in at 13%, which may be due to the availing of tax credits, in our view.

We expect the sales for HCAR to gain momentum in coming quarters amid the launch of new City model. According to channel checks, pre-bookings for the new City (likely 6th generation model and not the global 7th generation) have led to an influx of customers (also including investors, not just genuine consumers, in our view). The launch of the new City is a key trigger for HCAR, evident from the 19% rise in stock price since the end of April, as the new model is likely to be a strong competitor for Toyota Yaris (launched in 2020).

The lower-for-longer interest rates and the new Auto policy, potentially including reduction in taxes, are key catalysts for sales. We believe that GMs are set to rise with the normalisation of shipping costs and eventual allaying of globally supply-chain issues. We reiterate our Buy stance on HCAR, with a March 2022 TP of PKR365/sh.


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