ASII - Expecting Manageable Headwind

ASII’s earnings growth in 2022 is likely to remain solid and arrive at least within street expectations. Yet, it could slower in 2023 as we expect headwinds on Astra financial, agribusiness and Heavy Equipment and Mining Contracting (HEMCE) segments. Pressures on auto segment could arise when macro uncertainty worsen, resulting spending attitude changes which could hampered car loan demand. We adjust ’22F/’23F earnings by 6.2% and 1.8% amid slower auto and agribusiness earnings expectation. However, ASII still look attractive, trading at 8.6x 2023F P/E, or below its -1SD 10-year historical mean. Maintain BUY, with a target price of IDR7,350 (10.2x 2023F P/E). Solid 2022 4W sales to continue, yet slower in 2023 As of 10M22, 4W sales came in at 851,413 units (21.1%yoy), with Astra’s sales volume at 419,696 units or 21.5%yoy higher compared to 385,566 units in 10M21 and noted higher market share to 55%. We believe 2022 auto sales will remain solid at 956,658 unit (Gaikindo projection 900K960K). Nevertheless, we view softer tailwinds in 2023 as concern over the uncertainty still in place. In 2023 we forecast car sales at 966.753 units or 1% below Gaikindo which guiding 4W sales volume at 975.000 units. ASII should remain dominating the competition landscape next year with 55.2% of market share (549,531 units). On 2W, AISI project motorcycle sales at 5.6mn. Using the historical average market share, ASII could record 3.92mn units of 2W sales. Pressures on financial and agribusiness segment with flattish HEMCE business Our CPO analyst view that pressures on demand could continue on the back of fears over recession. We also project that China's demand would take time to recover in 2023. This could jeopardize CPO price to recover and sustain at 2022 level (ytd average at MYR5,200/tonne). Likewise, our coal analyst expects lower demand and price normalization which gradually take place in 2023 could derail HEMCE segment. On financial arms, lower financing demand and transmission on higher policy rate to loan yield could dragged down Astra’s financial business. Playing key role for 2023 earnings We expect Astra auto segment become as the key driver for 2023 earnings. We believe manufacturers will likely to continue launch various new variants to win market share and thus, will resulting to a stiffer competition and make dealer and car loan provider to continue offering the best deal. Government also has extended 0% down payment policy as an incentive to support sales in 2023. Key to auto sales in 2023 would be on the transmission pace of higher policy rate to auto loan rate in our view, which historically recorded a lag around one quarter. Our 2023F divisional net income growth for auto segment was much better compared to Astra other arms (see table). Expecting slower earnings We revised down ‘22F/‘23F earnings forecast by 6.2%/1.8% to accommodate with the uncertainty over global economic activity, spiking inflation and the end of low interest rate environment. Our new net profit estimation for Astra in 2022 and 2023 at IDR29.2 tn and IDR28.1 tn (see table). Maintain BUY with lower target price of IDR7,350 (IDR8,500 previously). We view ASII should deserve higher valuation from its current position. Despite our expectation on Astra lower earnings growth in 2023, we put our main expectation more on the minor impact of new covid variant cases escalation which have shrink ASII shares way below its fair value in 2019. Our target price of IDR7,350 is derived from SOTP. Currently ASII traded at 8.6x 2023F P/E or below its -1SD 10-year historical mean. Risks to our call: a) lower-than-expected car sales, CPO and Coal sales volume and b) higher than expected auto loan yield which will hamper demand.