TRIS Rating Affirms Company Rating and Outlook of KCAR at BBB+/Stable

Stocks and Financial Services Press Releases Wednesday December 9, 2015 16:14
Bangkok--9 Dec--TRIS Rating

TRIS Rating has affirmed the company rating of Krungthai Car Rent & Lease PLC (KCAR) at "BBB+" with "stable" outlook. The rating reflects the company's experienced management team and the competitive advantage from a full range of its complementary businesses. The rating also takes into consideration the company's adequate liquidity. KCAR's liquidity is supported by the stable cash flows from its portfolio of long-term leases, as customers pay their monthly rental fees. However, the rating is moderated by intense competition, low prices for used cars, and a weak economy. These factors continue to be major constraints on KCAR's profitability and expansion plans.

The "stable" outlook is based on TRIS Rating's expectation that KCAR will sustain its business profile by improving its market position. The company is expected to retain its major customers and acquire new accounts, despite intense competition.

The credit upside is limited as long as the domestic automobile market remains weak and used car prices stay low. These forces constrain KCAR's gains on sales of assets for lease and its overall financial performance. The rating could be negatively impacted if the gains on sales of assets for lease are further affected from the used car prices and a significant deterioration of KCAR's financial profile.

KCAR provides both long- and short-term automobile operating leases. In terms of net leased assets, from 2009 through 2011, KCAR was the third-largest domestic automobile leasing company, out of the 30 major firms in TRIS Rating's database. Since 2012, KCAR's market position has dropped as rivals aggressively expanded their loan portfolios. Price competition in the auto operating lease segment has been fierce, especially for large fleet contracts and government projects. KCAR abstained from some routine contract bids and chose not to pursue projects that carry low lease yields. KCAR's strategy is to emphasize its service quality to retain its customers. The company is searching for customers in new markets who value good service and are willing to pay for it.

KCAR's net leased assets dropped continuously from 2011 to 2013, sliding from Bt2,917 million at the end of 2011, to Bt2,863 million at the end of 2012, and to Bt2,704 million at the end of 2013. However, net leased assets rebounded during the last two years. Net leased assets slightly increased to Bt2,924 million at the end of 2014 and to Bt2,999 million at the end of September 2015. For the first half of 2015, operating lease income accounted for 96% of total rental revenue. At the end of June 2015, the company had rented 6,788 automobiles, up slightly from 6,562 units in 2014 and from 6,261 units in 2013. At the end of June 2015, about 87% of the rented automobiles were under operating lease contracts; the remaining units were for short-term rentals and for use as replacement vehicles.

KCAR has a competitive advantage because it is vertically integrated through a network of related companies. More than 50% of its leased assets have been acquired through authorized car dealers owned by KCAR's founding shareholders, the Chantarasereekul family. Vertical integration benefits KCAR in several ways. For example, KCAR can get information about special promotions offered by car manufacturers. KCAR can then acquire new cars at lower cost. In addition to more than 800 outsourced automobile maintenance service centers nationwide, KCAR has its own automobile maintenance service center. By having its own center, KCAR can reduce unnecessary maintenance expenses for its fleet of leased assets. After a lease contract expires, KCAR can liquidate all the leased assets through its subsidiary, Krungthai Automobile Co., Ltd. (KA). With KA's experienced management team and the certification of its used cars under the "Toyota Sure" program, KCAR is able to sell the cars at prices higher than the prices obtained from liquidation sales through traditional auction agents. KCAR has consistently recorded gains from the sales of leased assets.

KA's used car trading business has been affected by the government's recent first-time car buyer program. Demand for used cars was abruptly supplanted by demand for new cars, causing the prices of used cars to drop drastically. Auto manufacturers have implemented aggressive marketing campaigns in an effort to reduce their excess inventories of new cars. KA's management team put a priority on selling KCAR's retired vehicles rather than trading used cars. KCAR's gains from the sales of leased assets were also affected as demand for used cars fell. However, a conservative depreciation policy helped KCAR remain recorded gains from the sales of leased assets, despite realizing lower margins on the sales. KA's net profit comprised 12%-14% of KCAR's net profit during 2008-2012. The portion dropped to 3% in2013 but increased to 8% in 2014 and 6% in the first nine months of 2015. Used car prices had bottomed out in 2014, but a recovery to normal levels is still uncertain and may take time.

The gross profit margin of KCAR's rental segment has fallen due to fierce competition. The gross profit margin slipped from 19.1% in 2011 to 17.1% in 2012 and to 17.2% in 2013. However, the gross profit margin rebounded to 20% in 2014 and for the first nine months of 2015 due to KCAR's cost control efforts. In 2013, the low prices of used cars pushed KA's profitability down by 83% from the previous year. KA's net profit fell from Bt54.4 million in 2012 to Bt9.5 million in 2013. In 2014, KA's net profit rebounded to Bt16.7 million. KCAR reported a profit of Bt273 million in 2013, down 32% from the level in 2012. In 2014, net profit dropped to Bt214 million, as used car prices fell and used car trading slumped. For the first nine months of 2015, KCAR's net profit was Bt150 million, down 9% compared with the Bt165 million earned for the first nine months of 2014. KCAR's net profit margin slipped from 19.4% in 2012 to 16.3% in 2013, to 14% in 2014, and to 12.8% for the first nine months of 2015. Despite the drop in profitability, KCAR's profitability ratios are higher than its peers.

KCAR's financial liquidity and financial flexibility are moderate. The company has sufficient liquidity from stable cash flows it receives from auto lessees. In addition, the highly liquid nature of its assets partly mitigates liquidity risk.

Krungthai Car Rent & Lease PLC (KCAR)
Company Rating: BBB+
Rating Outlook: Stable

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