Equity Analysis /
Pakistan

Honda Atlas: New model needed to address competition; Neutral

    Intermarket Securities
    21 February 2020
    • We are Neutral on HCAR with a March 2021 TP of PKR208/sh. Depressed sales during MY20td and declining market share are key concerns; without a timely new model, we expect a slow recovery of the lost sales amid rising competition.
    • Major competition can emanate from Kia models, where Sportage (an SUV) has emerged as a good alternative to Civic due to competitive pricing, in our view. We think Sportage is a moderately expensive upgrade to SUV for most Civic customers.
    • The stock is trading at MY21/22f P/E of 24.8x/10.3x, which are expensive, in our view. A positive catalyst for sales recovery could be a new model, potentially the launch of 7th-generation City (previous model was launched in 2009). However, there has been little management guidance on its timing.

    Neutral on weak sales balanced by likely new model ahead

    We are Neutral on Honda Atlas Cars (HCAR), due to a sharper drop in sales vs. peers amid rising competition, where we expect a relatively slower recovery hereon compared to peers. Our March 2021 DCF based TP is PKR208/sh. We expect combined sales of Civic and City of 18,020 / 23,118 units in MY21/22f, which imply a capacity utilization of 33%/42% (compared to average 66% over the previous five years). Growing substitution to Kia’s Sportage by Civic customers is a key threat for HCAR. A new City model, however, could be a mitigating factor; but we think HCAR management will likely delay the launch until inflation and interest rates decline substantially and its own financial position improves. HCAR’s valuations are frothy, in our view, but this can be offset by an earlier-than-expected new model. 

    More affected by new competition than peers

    HCAR’s overall sales have declined more sharply during CY20, by 44% yoy vs. average 24% for peers, because of greater contribution from auto-financing, imposition of FED on 1,700cc cars (which disadvantaged HCAR more than Indus Motors), and overall decline in urban demand (cumulative price hikes of 10% since July 2019 for Civic and City). With the launch of the Kia Sportage, a 2,000cc SUV (August 2019), HCAR will potentially face rising competition for its Civic brand (1,800cc sedan), in our view, as Sportage is a moderately expensive upgrade. Also, the pricing gap between INDU’s 1,600cc Altis and Civic has widened considerably (about 18%), leaving HCAR exposed as INDU also offers 1,600cc variants which are relatively cheaper than the 1,800cc alternatives. 

    New-model may rekindle declining sales but seems delayed

    We think the launch of the 7th Generation City can revive sales for HCAR. Note that the introduction of the last Civic model led to a staggering 50% increase in sales post-model launch. The new City model is long overdue (existing one launched in 2009, where HCAR skipped the last global upgrade as it lacked the 1,300cc variant). Management has so far not given any indication of a new City model. We think poor macroeconomic situation and HCAR’s weak financial position are key deterrents. We estimate a new model typically entails about US$20-25mn capex (without marketing spend).

    For the first time since MY09, HCAR has resorted to short-term borrowing for working capital as advances from sales and short-term investments have dried up. This is mainly due to the substantial decline in car bookings and concurrent inventory pile up. As INDU will likely launch a new model, Yaris (or Vios), during 2020 to replace its 1,300cc Gli/Xli variants, launching the new City model is even more vital for HCAR (even as Civic faces higher competition), in our view. We have incorporated the new model in MY22, where an earlier than expected launch is a key upside trigger to our estimates.