Indonesian autos: bad like Brazil, but for different reasons

by SR on August 15, 2012

Indonesian discount rate vs Indonesia auto sales

Trying to prevent overheating

In a recent post on the auto market in Brazil, I commented that sales in May and June 2012 show the impact of governmental action, in this case to stimulate the auto market. 15,000 kilometers away on the other side of the planet, Indonesian auto sales in May and June 2012 also show the impact of government moves. Ironically enough, although the aim of the Indonesian authorities is to cool the market, the short-term impact has been identical to that of Brazil: a surge in sales.

The read-across here is pretty clear: the Japanese auto OEMs dominate the Indonesian market in the same way that the triumvirate of Volkswagen, GM and Fiat dominate the Brazilian market. Toyota is the market leader, but it is too large for Indonesia to really move the needle. For that you should look at Daihatsu, on which more below.

Switching focus back to the auto market a whole, the problem the Indonesian government faces is how to curb inflation and prevent a bubble forming. Interest rates would usually be one obvious tool, but the discount rate has been kept at a record low. In the chart at the top of the page I have juxtaposed the interest rate and auto sales. The two are closely related because about 70% of auto purchases in Indonesia are made using loans, according to the chairman of Gaikindo, the Indonesian auto association. As you can see, when the discount rate came off the local peak of 9.5% set in November 2008 and kept falling, auto sales bottomed in January 2009 and entered a steady upward trend that has lasted three years.

Indonesia auto sales by month (thousand units)

The chart above shows that auto sales in 2010 (the purple line) and 2011 (the blue line) bounced back to levels significantly higher than those seen in 2008 (the green line) before the global financial crisis. The red line shows 2012 sales and even during the first three months of the year sales were clearly ahead of previous year levels. In reaction to the overheating market and in order to prevent loan growth from spiralling out of control, Bank Indonesia and the Finance Ministry announced in March 2012 new regulations governing auto loans. The key point is that buyers will now have to put down a minimum of 30% of the vehicle’s price, compared to an average down-payment of 15% before the regulations were introduced on 15 June 2012.

In May and June 2012 we see the impact on sales as consumers come to decisions regarding auto purchases: even higher sales of autos as some purchasers rushed to buy autos before the more onerous loan requirements came into force. For January-June 2012, total auto sales came to 535k units, up 28.2% YoY (see red line in the chart below). Note that up to March 2012, cumulative sales had risen only 11.1% year-on-year.

Indonesia cumulative auto sales year-to-date (thousand units)

So there is no doubt that the impact of government regulations has been significant. Here’s another chart just to hammer home the point about rising auto sales: June 2012 was another record month, of which there have been many since 2009.

Indonesia monthly auto sales vs previous peak levels

The problem for auto OEMs is that now the artificial motivation – that is, the desire to avoid the new down-payment rules – for buying a new vehicle in May and June has passed we will almost certainly see a lull of a few months before buyers come back to the market. The introduction of the new regulations likely “pulled forward” demand that would have emerged in an organic fashion over the course of several months and condensed it into a space of two months sales. I would say that barring a minor miracle, sales in the second half will be significantly lower than in the first half (535k units) both because of the reaction to the demand “pulled forward” from July, August and September and also simply because fewer people will be able to afford to buy cars under the new 30% down-payment rules. In order to maintain the same level as in 2011 (894k units), the market needs sales of 359k units in the final 6 months of the year.

Daihatsu and Indonesia

The simple answer to the question “who loses?” is the players with the most significant exposure. In retail sales terms, Toyota, Daihatsu, Mitsubishi and Suzuki dominate the market, as shown by the market share chart below.

Indonesia auto market, share by brand (%)

Here I’m going to focus on the mini-car specialist of the Toyota group, Daihatsu. As already noted above, Indonesia is just too small to put a significant dent in Toyota’s earnings. Mitsubishi Motor is… a troublesome stock, best avoided except for momentum players. Suzuki is a solid company but in thematic terms Suzuki is seen as an Indian auto market stock, not an Indonesian market stock and so will probably move with changes in sentiment toward India.

Daihatsu share price performance year-to-date (%)

Let’s start with the share price. A glance is enough to show that Daihatsu (the red line in the chart above) has been a poor performer, falling 4.9% year-to-date, along with Suzuki (-5.3% YTD). Mazda has done significantly worse than either Suzuki or Daihatsu due to the problems in Europe, which is a major market for that company. Given that Indonesia is ticking over smoothly rather than imploding like Europe, one might reasonably ask why Daihatsu has performed so badly. To my mind, this is a case of a nervous stock market seeing the glass as half-empty rather than half-full.

Certainly, the Q1 results announced by the company on 27 July 2012 were excellent: revenue +36.1% year-on-year, operating profit +119.1% YoY. The share price did have a little pop after those results came out, but it soon faded again.
Daihatsu quarterly revenue and operating profit (billion yen)

It was also the second-highest quarterly operating profit and operating margin ever recorded by the company.

Daihatsu, quarterly operating profit margin (%)

Moreover, the outlook for the full year remains strong…

Daihatsu annual revenue and operating profit (billion)

This is all good stuff, so why is the market getting its knickers in a twist about Daihatsu? Indonesia remains one major point of concern for investors. Retail sales Daihatsu-brand vehicles in Q1 came to 175.8k vehicles in Japan, 45.2 in Malaysia and 41.9k in Indonesia. Total retail sales for the brand were 271.9k units, so Indonesia makes up 15% of retail sales. However, in addition to retail, Daihatsu also manufactures in Indonesia the Avanza MPV on behalf of Toyota. On a production basis Indonesia accounts for the 41.9k (actually production was 43.2k) of Daihatsu-brand vehicles pus the Toyota-consigned vehicles, for a total of 114.6k, which was 27.9% of Daihatsu’s global output and probably a similar amount in profit contribution.

Given that Malaysian auto market sales rose by just 1% YoY for the January-June 2012 period, all the growth expectations overseas are rooted in expanding sales in Indonesia. (Japan retail sales did grow rapidly in Q1 compared to 2011, but that comparison is essentially meaningless due to the damage caused in Q1 of the previous year by the Northern Japan earthquake.) The concern is that Indonesia is the only horse left pulling the Daihatsu cart.

The other ‘problem’ is that management did not revise guidance up at the Q1 point, leading to an immediate buzz of speculation that they might cut their guidance when they announce results for the second quarter (July-September) at the end of October or early November. In a bull market, nobody would care. In a bear market, which this is, nobody feels they can afford to overlook any bad news.

For me, Daihatsu is an interesting story of significant improvement over the past decade (21% CAGR in operating profit from March 2003 to March 2012) and growth potential for the next decade. Indonesia is a promising market in which Daihatsu has a very strong position. Its production network is solid and expanding (a new factory will begin operations at the end of 2012) and the stock looks attractive on 7.9x this year’s earnings.

Considering its dire performance so far this year Daihatsu’s stock does look tempting, but I would like the company to either revise down guidance or confirm it before taking a position. Also prices for subsidised fuel may be hiked in Indonesia (although this is still uncertain) and that would a further negative to hold the share price down. I still feel that auto OEMs with primary exposure to the US – like Toyota – are better bets for the time being than the emerging markets plays like Daihatsu and Suzuki. For its part, Daihatsu management seems quite confident on the outlook for Indonesia and plans to bolster sales for its Xenia MPV (its version of the Avanza) in the second half.

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