AEON Thana Sinsap (Thailand)

Transcription

1 AEON Thana Sinsap (Thailand) High time for a comeback AEONTS gains market share in credit card business, with card spending picking up AEONTS market share in the credit card industry (based on outstanding loans) has steadily risen from 7.2% in FY09 to 9.0% in FY13 and 9.3% in 2QFY14. With commercial banks now becoming more stringent in this business as evidenced by the slower growth for new cards issued over the last 12 months and no pick-up in card spending (as opposed to non-banks which saw a pick-up in card spending in May-July), we believe AEONTS will continue to gain market share at a faster pace going forward. We initiate coverage with a Buy rating and target price of Bt147/sh. Personal loan lending to increase along with economic recovery in 2015F Our economic team forecasts GDP growth of 5.3% in 2015 based on a domestic-led recovery with consumption-boosting policies and acceleration in budget disbursement to lend greater support for domestic spending. With 64% of AEONTS card holders living upcountry, a pick-up in rural consumption will lead to stronger loan demand. We also expect AEONTS personal loan market share to rise from 12% currently to 15% in FY16 as commercial banks which have stepped back from this segment take longer to re-enter. Meanwhile AEONTS can increase its focus on personal loans as the economic recovery accelerates given its strong in-house teams. Earnings have bottomed out; we forecast growth of 4% in FY14F and 25% in FY15F For 2QFY14 (May 21-Aug 20), the company posted a profit increase of 15% QoQ, after three consecutive quarters of QoQ contraction. Positive factors were a 25bps QoQ rise in NIM (better personal loan yield) and a rise in its coverage ratio to 117%. For 2HFY14, we expect profit to rise 7.2% over 1H supported by a recovery in loan growth and NIM. Our estimate of 25% profit growth in FY15F assumes: 1) loan growth of 18% (after +15% in FY14F), 2), NIM to rise 39bps to 23.3%, 3) credit costs at % (vs. 7.8% in FY14F), and higher contributions from both local and CLMV subsidiaries. Initiating coverage with BUY rating and target price of Bt147/sh AEONTS share price has risen 17% YTD (vs. SETFIN +28%). The stock is currently trading at FY14F P/BV of 2.6x, slightly below its historical average of 2.8x. We believe key drivers for the share price going forward are: 1) easing delinquencies as the economy gradually recovers (we believe NPLs already peaked in 2QFY14); 2) an earnings recovery in 2HFY14; and 3) potential to enter the Nano Finance scheme which is being considered by the government (interest rates at a maximum of 36%). Our 12-month TP of Bt147/sh is based on the stock s historical average PBV of 2.8x assuming FY15F BV, with ROE rising to 27.5% in FY15F. Rating BUY (Initiation of Coverage) 12 month Target Price Bt140 Current Price (10/10/2014) Bt110 Upside/Downside 34.0% CG Rating 3 Sector FIN Sector PER (x) 16.1 SHARE SUMMARY Issued shares: 250.0m Par value: Market capitalization: Avg. Daily Turnover: Bt1.0 Bt27.5bn Bt7.3m Foreign Limit/Actual (%) 49/49 Free Float: 29.9% NVDR: 8.8% Beta (3 years) 0.7x TISCO s forecast vs. consensus EPS (Bt) TISCO Consensus % Diff. 2014F % 2015F % PRICE / PRICE RELATIVE Bt Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 FINANCIAL SUMMARY Fiscal year end 20 Feb FY11 FY12 FY13 FY14F FY15F FY16F Net profit (Bt, m) 161 1,688 2,501 2,611 3,251 4,342 Net profit growth (%) (83) EPS (Bt) EPS growth (%) (83) PER (X) PBV (X) ROE (%) Yield (%) BVPS (Bt) DPS (Bt) Source: DB TISCO Source: Bloomberg Finance LP Performance (%) -1m -3m -12m AEONTS (5.17) (0.90) SET (1.86) Kanchan Khanijou (ID:030871) (66) kanchan@tisco.co.th

2 Earnings recovery story unfolding AEONTS announced quarterly profit for 2QFY14 (May 21-Aug 20) at the end of last month. Its profit rose 15% QoQ, ending a streak of three consecutive quarters of earnings contractions. Quarterly loan growth fell to 2.3% QoQ from 3.7% QoQ in the previous quarter but this was mainly due to the imposition of martial law and the May 22 military coup. On the plus side its NIM recovered faster than we expected (+25bps QoQ to 22.3%) on better yield of personal loans while the company s coverage ratio (loan-loss provision/npl) rose to 117%. We believe NPLs have already peaked in this quarter at 3.3% and will ease as the economy stages a gradual recovery (more evidently in 4QFY14). We expect earnings to strengthen in 2H, rising 7% over 1H and to pick up strongly in FY15 and FY16 on the back of the economic recovery and gains in market share in both AEONTS personal loans and credit card businesses. We forecast profit growth to accelerate from 4% in FY14 to 25% in FY15 and 34% in FY16. Our FY15 profit growth estimate of 25% assumes: 1) loan growth of 18% (after a +15% increase in FY14F), 2) NIM to rise 39bps QoQ to 23.3%, 3) a fall in credit costs to % (vs. 7.8% in FY14F) and higher contributions from both local and CLMV subsidiaries. A stronger than expected recovery in domestic demand next year can have a large impact on AEONTS bottom line. An 25bps change in NIM will impact net profit by 5.0% and a 25bps change in credit costs will impact net profit by 4.5%. 1) Loan demand picking up Our talks with the company confirmed total loan demand has picked up from a low of Bt7.6bn/month in June to currently Bt8.0bn/month. We now expect a return to normalized levels of Bt bn during the festive months of December and January. For 1HFY14 (Feb 21-Aug 20) AEONTS reported loan growth of just 6%. However, we forecast fullyear loan growth of 15%, with stronger demand in 2HFY14. especially in 4QFY14 (Nov 21-Feb 20). This will be supported by more spending during the holiday season and also a gradual recovery in GDP growth. Our economic team expects the government s economic-boosting policies to start materializing in 1Q15, led by a pick-up in domestic spending. This should spur spending activities by low-mid income earners which are AEONTS target groups. Our economic team forecasts 2015F GDP growth at 5.3%, based on a domestic-led recovery with consumption-boosting policies and acceleration in budget disbursement to lend greater support for domestic spending. With 64% of AEONTS card holders living upcountry, a small pickup in rural consumption will lead to stronger loan demand. Hence we forecast loan growth to accelerate over the next two years to 18% in FY15 and 20% in FY16. Figure 1. GDP growth for 2015 supported by stronger domestic demand YoY (%) F 2015F Real GDP Private Consumption Expenditure Government Consumption Expenditure Gross Fixed Capital Formation Private Investment Public Investment Nominal exports in USD Source: NESDB, TISCO Economic Strategy Unit (ESU) Figure 2. Loan growth to pick up along with economic recovery Bt, bn % Hire Purchase & Others Credit Card Personal Loan 32% 26% 15% 18% 20% 49% 13% 18% 15% 18% 20% FY11 FY12 FY13 FY14F FY15F FY16F 2

3 Loan portfolio details: a) Personal loans: This is the largest loan segment in AEONTS portfolio, accounting for 62% of total loans and 54% of total revenue last year. Loan growth was strong at 30%, 13% and 18% for FY11-13 respectively. We estimate loan growth of 15% for FY14F and 18% for FY15F on the back of an improvement in economic growth (we believe our loan growth assumption is on the conservative side and there is potential upside). We also expect AEONTS personal loan market share to rise from 12% currently to 15% in FY16 as commercial banks which have stepped back from this segment take longer to re-enter. Meanwhile AEONTS can increase its focus on personal loans as the economic recovery accelerates given its strong in-house teams. This clientele group has income of around Bt8,000/month. Once applications are approved, individuals will be issued an AEON Member card which they can use to obtain personal loans. This includes cash loans and purpose loans (electrical appliances, home decorative products and IT items) which can be bought at member dealer stores (as of 1HFY14 there were 16,412 members) as well as department stores. Interest rates, service fees and other operation fees in aggregate can be charged at a maximum 28% annual effective rate according to Bank of Thailand regulations. Figure 3. Personal loan growth forecast Figure 4. AEONTS market share in personal loans Bt, bn Personal loan (LHS) growth YoY (RHS) % Commercial banks 52% AEONTS 12% Other Nonbanks 36% 0 FY11 FY12 FY13 FY14F FY15F FY16F 0 Source: Bank of Thailand, TISCO Research Source: Bank of Thailand, Company data, TISCO Research * As of May

4 b) Credit cards: This is the second largest segment in the portfolio, accounting for 36% of FY13 total loans and total revenue. Loan growth was high at 20%, 32% and 26% for FY11-13 respectively. We estimate growth of 15% for FY14 and 18% for FY15 which may prove conservative if economic growth picks up faster than we anticipate. AEONTS market share in the credit card industry (based on outstanding loans) has steadily risen from 7.2% in FY09 to 9.0% in FY13 and currently stands at 9.3% (as of 2QFY14). With commercial banks now becoming more stringent in this business as evidenced by the slower growth for new cards issued over the last 12 months and no pick-up in card spending (as opposed to non-banks which saw a pick-up in card spending in the May-July period, see Figure 5), we believe AEONTS will gain market share at a faster pace going forward. This clientele group of AEONT has a minimum income of Bt15,000/month and can use AEONTS credit cards to purchase products from member stores as well as obtain cash advances from ATMs. The company has 1) AEON International cards (AEON Master Card, AEON Visa Card and AEON JCB card) and 2) AEON co-branded cards which are issued with other companies in several lines of business such as AEON Royal Orchid Plus Platinum and AEON Wuttisak Visa Card. Income from credit cards includes interest, revolving fee, collection fee and other fees with annual effective interest rates of 23-24%. Figure 5. Rise in non-banks credit card spending Figure 6. AEONTS market share for credit cards %YoY (10) (20) Banks card spending Non-banks card spending % Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 FY08 FY09 FY10 FY11 FY12 FY13 2QFY14 Source: Bank of Thailand, TISCO Research Source: Bank of Thailand, Company data, TISCO Research c) Hire purchase: This accounted for only 2% of last year s total portfolio and revenue and includes motorcycle deals. Under the hire purchase contract, goods are owned by the company. AEONTS then lends the goods to the borrower for a fixed period (6-48 months) and on expiry of the term it transfers ownership to the borrower. 4

5 2) Net interest margin (NIM) up in 2QFY14 after three consecutive QoQ declines After three consecutive QoQ declines in NIM due to the stagnant economy, NIM rose in 2QFY14 by 25bps to 22.3%. This was due to higher yields on local personal loans (we believe this could be due to an easing of competition by commercial banks, which seem to be taking a step back in this area) and higher yields on personal loans in subsidiaries in CLMV countries which charge interest rates high at 30-40%. We believe the company s NIM has already bottomed out and will gradually pick up in line with the improving economy. For this year we forecast a NIM decline of 81bps YoY to 23.0% before a rebound by 39bps to 23.3% in FY15F and an increase by another 47bps to 23.8% in FY16F. Note that every 25bps change in NIM has a 5.0% impact on net profit. With long-term financing at 75% of total borrowing as of 2QFY14 we expect AEONTS cost of funding to rise at a slower pace than that of its competitors. Our economic team believes the first Bank of Thailand policy rate hike will take place in 2Q15 as the country s inflation trajectory has shifted downward on the back of the stronger-than-expected impact from price control measures. Figure 7. NIM to recover along with Thailand s economy % FY11 FY12 FY13 FY14F FY15F FY16F 5

6 3) Provisioning set to ease in line with economic recovery In response to NPLs edging up over the last 12 months due to economic stagnation, from 2.5% in Aug-2013, to 3.3% as of 2QFY14 (end-aug), AEONTS increased its credit cost (provision/total loans) - from 7.2% (end-aug 2013) to 9.9% for the quarter ending in Aug In addition, the company set aside higher-than-required provisioning in the latest quarter to prepare for the company s adoption (likely to occur next year) of a new provisioning method (collective). The move is in line with its parent company in Japan (note that the provisioning switch may be reversed in FY15-16 if it results in a higher than required rate). We believe NPLs have already peaked in 2QFY14 and hence with provisioning already healthy, we expect credit cost to decline to a more normalized level from 3QFY14 onwards. For this year we expect credit cost to reach 7.8%, surpassing last year s % due to increased NPLs and the switch in provisioning to the collective method. For FY15-16, we assume that credit cost will revert to a normalized level of % - in line with economic recovery (fewer NPLs). With our expectation of lower credit cost (%), loan-loss coverage (LLR/NPLs) should rise from an estimated 106% in FY14F to 142% in FY15F. Note this coverage may be higher than required, depending on how steady economic growth proves to be next year. Hence we may see reduced provisioning in 2HFY15. Also note that every 25bps change in credit cost will impact net profit by 4.5%. Figure 8. NPL/total loans likely peaked in 2QFY14 Figure 9. Expect provision/total loans to decline % % Q13 2Q13 3Q13 4Q13 1Q14 2Q FY12 FY13 FY14F FY15F FY16F 6

7 4) Local subsidiaries performing well; CLMV urbanization trend an extra boost AEONTS has a total of 5 subsidiaries, 2 domestic, one in Cambodia, one in Myanmar, and one in Laos, as well as a 20% stake in a company in Vietnam. Part of AEONTS s overall strategy is to expand its business into foreign countries, primarily neighboring Asian countries which are enjoying rapid economic growth. While these subsidiaries in total accounted for 6.8% of 1HFY14 net profit, the company has a medium-term target of 10%. The company s first move abroad was its purchase of a 20% stake in 2008 of a Vietnamese company. That venture was followed by moves to establish subsidiaries in Cambodia in 2011, Myanmar in 2012, and Laos in These subsidiaries remain in the expansion phase and focus on capturing opportunities in the personal loan, hire-purchase, and credit card businesses. AEONTS injected an additional Bt250mn last month into the subsidiaries and now holds 80% in Cambodia, 100% in Laos (92.3% directly and the rest indirectly through a fully-owned subsidiary) and 100% in Myanmar. With a still-nascent urbanization and middle class expansion trend, the business growth rate in these countries outstrips that of Thailand. Cambodia subsidiary already profitable: It took 2.5 years for this subsidiary to turn profitable, boasting a net profit of Bt18m in FY13 and Bt14m in 1HFY14. Management remains bullish on the outlook for business in Cambodia and expects the neighboring subsidiary to continue riding the country s urbanization trend. AEONTS s Cambodia arm holds a hire-purchase motorcycle portfolio with an interest rate charged at 30-40%. In addition to the head office in Phnom Penh, there are 4 branches across the country (company targets 10). Note that the parent company in Japan opened the first Aeon Mall in Phnom Penh in July of this year. Myanmar & Lao to turn profitable in FY15 and FY16, respectively: The Myanmar subsidiary of AEONTS was incorporated in November 2012 mainly as a hire-purchase business for electrical appliances, mobile phones, motorcycles, and personal loans. Interest rates for the portfolio are capped at 30%. AEON adjusted the platform it applied in Thailand to suit the culture in Myanmar. The subsidiary reported a 1HFY14 loss of Bt6.5m but we expect positive profit contribution to start in FY15. Meanwhile the Lao subsidiary, which began operations in 2013, reported a loss of Bt14.5m in 1HFY14. We expect this subsidiary to start contributing profit in FY16. Local subsidiaries: AEONTS has two wholly owned local subsidiaries. AEON Insurance Service (sells both life and non-life insurance) and ACS Servicing (provides a debt collection service for group companies as well as other financial service companies). Both companies have been relatively successful, with 1HFY14 profit for the insurance subsidiary up 26% YoY to Bt52m and for the debt collection subsidiary up 69% YoY to Bt41m. Management is optimistic on the prospects for these two local subsidiaries and expects them to widen contribution to AEONTS s bottom line going forward (for 1HFY14, net profit of these two subsidiaries accounted for 7.4% of AEONTS s net profit). Figure 10. Subsidiary performance for 1H14 AEON Insurance AEON Credit Service Sub. Cambodia Sub. Myanmar Sub. Lao Bt, m % YoY Bt, m % YoY Bt, m % YoY Bt, m % YoY Bt, m % YoY Revenue n.a. 3.0 n.a. Profit (6.5) n.a. (14.5) n.a. 7

8 Attractive Valuation YTD, AEONTS s stock price is up 17% vs. the SETFIN s +28%, resulting in the stock trading at a P/BV of 2.6x for FY14F - below its historical average of 2.8x (refer to Figure 11). On a 12 months P/BV forward valuation, the stock is trading at only 2.1x FY15F. Our 12 months TP of Bt147/sh for FY15F is based on historical average P/BV of 2.8x. We forecast a high 28% ROE for FY15F. Based on current P/BV valuation, AEONTS and KTC are currently trading at roughly the same level (2.6x - see Fig. 12). For AEONTS, this is well under the premium seen in early We believe going forward, as AEONTS earnings recovery story unfolds, the stock will return to trade at a premium valuation. We project superior earnings growth and ROE for AEONTS vs. KTC in FY15F (based on Bloomberg consensus for KTC, refer to Figure 13). We believe the current share price has already factored-in downside risk to asset quality and loan growth both of which we believe already bottomed in 2QFY14. Looking ahead to 3QFY14, we anticipate a small recovery followed by a more pronounced rebound in 4QFY14. Going forward we believe the following will act as catalysts for the stock price; 1) fewer delinquencies due to gradual economic recovery (we believe NPLs already peaked in 2QFY14), 2) earnings recovery in 2HFY14, and 3) potential for the company to enter the Nano Finance scheme which is being considered by the government. Potential Upside: The Ministry of Finance is planning a Nano Finance scheme which would allow financial institutions to offer a maximum of Bt100,000 per customer in unsecured loans with an interest rate ceiling of 36% p.a. (this is higher than the current 28% ceiling for personal loans). AEONTS management has confirmed that the firm is interested in this scheme. Given its expertise in this field and the subsequent potential for profitability, we see it as highly likely the company would join the scheme. Figure 11. Trading below historical P/BV average x Std, Std, Avg, Std, Std, (0.6) (1) Figure 12. At current P/BV, AEONTS looks more attractive than KTC x KTC AEONTS Figure 13. Valuation Comparison Market Cap NP (Bt, m) NP growth (%) PE (X) ROE (%) PBV (X) (US$, m) 14F 15F 14F 15F 14F 15F 14F 15F 14F 15F AEONTS 27,625 2,611 3, KTC* 15,534 1,372 1, * KTC is based on Bloomberg consensus 8

9 Company background AEON Thana Sinsap (AEONTS) was incorporated in 1992 by AEON Credit Service in Japan, which is listed in the Tokyo stock exchange and provides financial services including credit card, hirepurchase, personal loans, and other services. AEON Credit Service in Japan is now a holding company under the name AEON Financial Service and has expanded its business to other Asian markets, such as Hong Kong, Thailand, Malaysia, Philippines, Indonesia, China, Taiwan, Vietnam, Cambodia, India, Laos and Myanmar. The holding company has a 35% stake in AEONTS AEONTS, like its parent company AEON, specializes in consumer financial services. The company offers hire-purchase loans for household products such as appliances, electronic equipment, and furniture, as well as other unsecured personal loans for general purposes. It also issues locally accepted AEON credit cards, and internationally accepted Master cards and JCB credit cards. As of August 20, 2014, the company has a total of 7.15m cards; 2.2m credit cards and 4.9m member cards (personal loan cards). In Thailand, AEONTS has 117 branches, 453 ATMs and over 16,418 member dealers to provide financial services to AEON cardholders. Risk factors includes: 1) slower than expected recovery in domestic consumption which may hinder AEONTS loan growth, and 2) a sharp increase in interest rate could affect funding cost (to reduce this risk, 75% of AEONTS total borrowing is long-term as of 2QFY14). Figure 14. Credit Cards and Member Cards Member Cards Credit Cards FY11 FY12 FY13 2QFY14 Figure 15. AEONTS nework Number Bangkok Province ATMS % 53% Branches % 66% Affiliated Dealers 16,413 32% 68% 9

10 INCOME STATEMENT (Bt, m) KEY FINANCIAL RATIOS (%) Year Ended February 20, Year Ended February 20, FY12 FY13 FY14F FY15F FY16F FY12 FY13 FY14F FY15F FY16F Interest & dividend Income 10,988 13,962 15,851 18,835 22,839 Loan growth Interest expenses 1,781 2,061 2,324 2,794 3,349 Yield on earning assets Net Interest Income 9,207 11,901 13,527 16,041 19,490 Cost of funding Non-interest income 1,244 1,273 1,693 1,361 1,537 Interest spread Non-interest expense 4,968 6,194 7,061 8,120 9,338 Net interest margin Profit before tax & provision 5,484 6,980 8,159 9,282 11,689 ROA Tax ,085 ROE Equities & minority interest NPLs / total Loans Profit before provision 4,818 6,344 7,506 8,469 10,603 Provision / total Loans Provision 3,129 3,843 4,896 5,218 6,261 LLR / NPLs Profit bef. extra items 1,688 2,501 2,611 3,251 4,342 LLR / total Loans Extra items Cost to income ratio Net Profit 1,688 2,501 2,611 3,251 4,342 D/E (x) EPS (Bt) QUARTERLY RESULTS (Bt, m) BALANCE SHEET (Bt, m) 2Q13 3Q13 4Q13 1Q14 2Q14 As of February 20, Interest & dividend Income 3,484 3,628 3,692 3,640 3,799 FY12 FY13 FY14F FY15F FY16F Interest expenses Cash 2,187 2,435 2,125 2,800 3,176 Net Interest Income 2,988 3,110 3,119 3,079 3,206 Gross loans 45,394 54,929 63,168 74,539 89,446 Non-interest income Loan loss reserve 1,620 1,912 1,912 2,434 3,060 Non-interest expense 1,549 1,596 1,541 1,616 1,763 Net loans 43,774 53,017 61,256 72,105 86,386 Profit before tax & provision 1,772 1,853 1,888 1,782 2,286 Total Assets 51,013 60,637 68,823 80,617 95,558 Tax Borrowings 40,554 48,833 55,151 64,421 75,741 Equities & minority interest (0) 0 Total liabilities 43,755 51,729 58,177 67,582 79,044 Profit before provision 1,601 1,692 1,727 1,633 2,114 Paid-up capital Provision 917 1,050 1,121 1,046 1,441 Total Shareholders' Equity 7,258 8,906 10,644 13,033 16,512 Profit bef. extra items BVPS Extra items Net Profit EPS (Bt) Yield on earning assets (%) Cost of funds (%) Net interest margin (%) Cost to income ratio (%) NPLs / total Loans (%) Provision / total Loans (%) LLR / NPLs (%)

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