Market Pulse. Inter. Record sales tempered by emerging risks. Pakistan Autos

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1 Inter Pakistan Autos Record sales tempered by emerging risks Research Entity Number REP-085 Pakistan s auto industry registered sales of 18,518 units in Jun 18, up 20%YoY, taking FY18 sales to 258,632 units, up 21%YoY. However, sales declined 15%MoM as public holidays resulted in less working days. Tractor sales were up 29%YoY in FY18, reaching sales of 70,866 units where MTL/AGTL occupied 60/39% market share, in line with historical averages. During Jun 18, however, sales declined by 12%YoY to 3,895 units. While the auto segment is currently trading at a discount on P/E compared to the Index (6.5x vs 7.3x), we expect the sector to continue trading below market multiples due to less exciting macro outlook (higher interest rates, weaker PKR) and ban on sales to tax non-filers. Indus Motors (INDU): INDU recorded sales of 4,548 units in Jun 18, up 26%YoY during Jun 18. During FY18, the company recorded growth of just 5%YoY with sales of 63,068 units due to capacity constraints; this has been addressed after the recent debottlenecking exercise, completed in 4QFY18. Annual capacity (with overtime) now stands at 75k, compared to 65k earlier. While Corolla sales contracted by 2%YoY in FY18, response was phenomenal for Fortuner (4,186 units, up 3x YoY) and Hilux (7,470 units, up 27%YoY). INDU also came up with price increases (2-6%), after PKR depreciation in Jun 18. Pak Suzuki (PSMC): PSMC sold 10,344 units in Jun 18, up 15%YoY with FY18 sales registering growth of 26%YoY (144,070 units). Wagon-R (up 65%YoY) and Mehran (up 22%YoY) were the main growth drivers, as few alternatives in the Economy segment and uptick in ride-hailing services propped up their demand (these variants are also the cheapest passenger cars available). PSMC has also announced to discontinue Mehran VX (base version of Mehran) by Nov 18. Complete phase-out of this model is unlikely in the near-term, in our view, due to dependence of vendor industry (Mehran is the most localized car) and the most affordable choice for consumers transitioning from twowheelers. Honda Atlas (HCAR): HCAR s sales reached 3,626 units in Jun 18, up 27%YoY, where FY18 sales totaled 51,494 units, up 31% YoY (highest growth among the three players). While Civic/City volumes grew by a healthy 16%YoY in FY18, major jump came from Honda BR-V (launched in Apr 17), where volumes tripled YoY to 8,684 units. Following INDU, HCAR also raised its prices by 2-4% in Jun 18. Tractors, Trucks and Bikes: Tractor sales dropped 12%YoY to 3,895 units in Jun 18, where most of the seasonal buying was done in earlier months, in our view. FY18 volumes stood at 70,866 units (up 29% YoY), close to highest yearly sales of 71,512 units achieved in FY10. Millat Tractors (MTL) and Al-Ghazi Tractors (AGTL) occupied 60% and 39% market share during FY18, in line with historical averages, as both players reaped the benefits of lower GST of 5%, improved farmer income and tractor scheme by Sindh government. However, the bull cycle for tractor industry can reverse, in our view, due to (i) potential increase in GST going forward, amid burgeoning fiscal constraints, (ii) lack of tractor schemes near-term and (iii) likely water shortage which can slow agri growth. Truck sales reached a record high of 9,203 units in FY18, up 23% YoY, corresponding with upbeat construction activity (local cement dispatches up 15% in FY18). Two-wheeler sales crossed 1.8mn units in FY18, up 18%YoY. These numbers, however, are from PAMA assemblers only and represent only 60% of the two-wheeler market. Risks lie ahead Auto-OEMs are currently trading at a forward P/E of 6.5x, compared to 7.3x (IMS estimate) for the KSE-100 index. We think that the sector will continue to trade at a discount to the overall market due to less exciting macro outlook (higher interest rates, weaker PKR) and ban on sales to tax non-filers. To recall, Non-filers represent roughly 60%, 50% and 20% of the customer base for INDU, PSMC and HCAR, respectively. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 3,4 &5 Intermarket Securities is the Local Research Partner of Exotix Capital IMS Auto Universe Ahmed Raza ahmed.raza@imsecurities.com.pk Ext: July F PER (x) P/B (x) EV/Ebitda (x) Autos PSMC HCAR INDU Source: IMS Research Autos - Sales volume ('000) Industry Performance Industry Sales % -15% % Cars % -14% % LCVs & Pickups % -20% % Tractors % -42% % Trucks % -14% % 2/3 wheelers % -8% 1, % Company wise PSMC % -11% % INDU % -23% % HCAR % -15% % MTL % -43% % AGTL % -40% % HINO % -2% % GHNI % 7% % INDU % -23% % Corolla % -24% % Hilux % -19% % Fortuner % -19% % PSMC % -21% % Bolan % -8% % Ravi % -36% % Mehran % -10% % Cultus % -4% % Wagon R % 0% % Swift % -20% % HCAR % 15% % Civic & City % -22% % BR-V % 36% 8.68 n.m. Source: PAMA

2 Jul-17 Aug-17 Oct-17 Nov-17 Jan-18 Feb-18 Apr-18 May-18 Jul-18 Jul-17 Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 KSE100 Index & Volume 54,000 50,000 46,000 42,000 38,000 34,000 30,000 1, Earnings yield vs. T-bill spread 7.0% 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% Source: PSX Vol. Shares (mn) - Rhs KSE100 Index pts., IMS Research Earnings Yields - 12m Tbills Spread Sector wise FIPI Flows (US$mn) 11-Jul-18 MTD CYTD FYTD Others (0.11) (2.1) 52.6 (2.1) Cement (0.77) (5.6) (9.2) (5.6) Banks (3.44) (11.7) (107.9) (11.7) Fertilizer (5.4) 2.4 Food (0.78) (0.8) (0.3) (0.8) E&P (0.69) (4.3) (54.1) (4.3) OMCs (0.37) (2.1) (9.8) (2.1) Power (0.37) (1.1) (16.1) (1.1) Telecom (0.81) (0.8) 1.1 (0.8) Textile 0.03 (0.4) (10.7) (0.4) Total (6.5) (26.5) (160.0) (26.5) Source: NCCPL World Indices Last Close DoD Δ DoD Δ (%) CYTD Δ (%) FYTD Δ (%) Pakistan 39, % -2.2% -5.5% China 2, % -16.0% -2.4% Hong Kong 28, % -5.4% -2.2% India 36, % 6.5% 2.4% Indonesia 5, % -7.3% 1.6% Malaysia 1, % -6.0% -0.2% Japan 21, % -3.7% -1.7% Singapore 3, % -4.5% -0.6% Korea 2, % -7.6% -2.0% Taiwan 10, % 0.3% -1.5% Bangladesh 5, % -13.9% -0.5% Sri lanka 6, % -4.3% -1.6% Philippines 7, % -14.3% 1.9% Thailand 1, % -6.7% 2.6% Vietnam % -9.3% -7.0% USA 2, % 3.8% 2.0% UK 7, % -1.2% -0.6% Germany 12, % -3.9% 0.9% Portfolio Flows (US$mn) Current WTD* MTD 12M FYTD CYTD Total FIPI (6.5) (22.8) (26.5) (316.4) (26.5) (160.0) Individuals Companies Banks / Dfi (0.2) (53.5) NBFC (0.2) (7.7) 0.4 (0.3) Mutual Funds (0.9) (15.9) (27.2) (63.8) (27.2) (10.7) Other Organization Broker Trading 0.4 (0.7) (3.9) (51.9) (3.9) (22.0) Insurance Companies Source: NCCPL Commodity Prices Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) Gold - US$/oz 1, % 2.2% -4.5% -0.7% Oil- US$/bbl % 57.1% 17.1% -4.5% Cotton US /lb % 25.6% 8.1% 1.3% Coal - US$/MT % 30.8% 14.5% 4.6% CRY Index % 10.9% -0.5% -3.8% Forex & Money Close DoD Δ YoY Δ bps CYTD Δ bps FYTD Δ bps 6m Tbill yield (%) Y PIB yield (%) m Kibor (%) Close DoD Δ DoD Δ (%) YoY Δ (%) CYTD Δ (%) FYTD Δ (%) PkR/US$ % 15.4% 10.1% 0.0% PkR/EUR % 18.5% 7.5% 0.4% PkR/JPY % 18.7% 11.5% -0.4%

3 I, Ahmed Raza, certify that the views expressed in the report reflect my personal views about the subject securities. I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations made in this report. I further certify that I do not have any beneficial holding of the specific securities that I have recommendations on in this report. Ratings Guide* Upside Buy More than 15% Neutral Between 0% - 15% Sell Below 0% *Based on 12 month horizon unless stated otherwise in the report. Upside is the percentage difference between the Target Price and Price. Valuation Methodology: We use multiple valuation methodologies in arriving at a Target Price including, but not limited to, Discounted Cash Flow (DCF), Dividend Discount Model (DDM) and relative multiples based valuations. Risks: (i) PKR depreciation against Yen and US$, (ii) earlier than expected entry of new competitors, and (iii) volatility in commodity prices. Disclaimer: Intermarket Securities Limited has produced this report for private circulation only. The information, opinions and estimates herein are not direct at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject Intermarket Securities Limited to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable where such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness and correctness. This report makes use of forward looking statements that are based on assumptions made and information currently available to us and those are subject to certain risks and uncertainties that could cause the actual results to differ materially. No part of the compensation of the author(s) of this report is related to the specific recommendations or views contained in this report. This report is not a solicitation or any offer to buy or sell any of the securities mentioned herein. It is meant for information purposes only and does not take into account the particular investment objectives, financial situation or needs of individual recipients. Before acting on any information in this report, you should consider whether it is suitable for your particular circumstances and, if appropriate, seek professional advice. Neither Intermarket Securities Limited nor any of its affiliates or any other person associated with the company directly or indirectly accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. Subject to any applicable law and regulations, Intermarket Securities Limited, its affiliates or group companies or individuals connected with Intermarket Securities Limited directly or indirectly may have used the information contained herein before publication and may have positions in, or may from time to time purchase or sell or have a material interest in any of the securities mentioned or may currently or in future have or have had a relationship with, or may provide investment banking, capital markets and/or other services to, the entities mentioned herein, their advisors and/or any other connected parties

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