ASII - Riding the momentum of recovery

• ASII’s 1Q22 net profit surged 84.0% YoY to Rp6.86tn, representing 30.5% of our FY forecast 

• We expect domestic 4W and 2W sales of 960K units and 5.2mn units, respectively in 2022, amid increasing purchasing power, low interest rates, and tax waiver. ASII has raised selling prices amid inflationary pressures. Higher amount financed and asset quality will improve financial services, while soaring coal and CPO prices will boost HEMCE and agribusiness 

• Reiterate BUY with 12.2% upside potential on a 12‐month view, backed by 1) economic recovery; 2) well‐accepted products; 3) strong commodity prices; 4) infrastructure development; 5) diversification; and 6) robust balance sheet 

\Above expectations ASII’s net profit jumped 84.0% YoY to Rp6.86tn in 1Q22, accounting for 30.5%/28.7% of our/consensus FY estimates. The robust result was mainly driven by stellar performance of heavy equipment, mining, construction and energy (HEMCE), automotive, financial services, as well as agribusiness. Net profit of automotive rose 55.7% YoY to Rp2.23tn in 1Q22 as Astra’s 4W sales increased 43.7% YoY amid luxury‐goods sales tax incentives, while 2W sales declined 6% YoY. For financial services, net profit grew 49.5% YoY to Rp1.47tn in 1Q22 on the back of higher contribution from consumer finance. Furthermore, net profit of HEMCE skyrocketed 137.6% YoY to Rp2.59tn in 1Q22, boosted by Komatsu sales, mining contracting, and coal mining amid soaring coal prices. In terms of agribusiness, net profit escalated 198.4% YoY to Rp385bn in 1Q22, supported by surging average CPO price by 53% YoY to Rp14,912/kg. Moreover, net profit of infrastructure and logistics went up 181.0% YoY to Rp118bn in 1Q22 due to an improvement in toll road business. Signs of automotive sector revival ASII’s 4W sales rose 43.7% YoY to 142,039 units, while domestic 4W sales increased 41.1% YoY to 263,822 units in 1Q22. As a result, Astra’s market share went up from 52.9% in 1Q21 to 53.8% in 1Q22. We revise up our 4W sales assumption to 960K units this year, supported by 1) economic recovery in line with eased restrictions; 2) low interest rates; and 3) extension of luxury‐goods sales tax exemption. To maintain market share of over 50%, the company has launched new models that are well accepted such as Avanza, Xenia, Raize, Rocky, Voxy, and others eligible for tax incentives, as well as electric vehicles (EV). However, we see that competition will remain intense following the launches of LMPV models from other players. To anticipate inflationary pressure in raw materials, ASII has raised selling prices, while conducting cost management optimization. Astra utilizes multisourcing approach in the midst of semiconductor shortage. Meanwhile, ASII’s 2W sales declined 6% YoY to 952K units, while domestic 2W sales decreased 2% YoY to 1.26mn units in 1Q22. We expect 2W sales nationwide to reach 5.2mn units this year, driven by improving purchasing power, soaring commodity prices, and support from financing companies. Solid non‐auto segments outlook We believe financial services to improve this year following higher amount financed in line with growing vehicle sales coupled with better asset quality. Amid potential rate hikes, Astra will manage CoF by diversifying source of funding from domestic and overseas, while maintaining prudent approach in provisioning. For HEMCE, we expect that surging coal prices will boost performance of construction machinery, mining contracting, and coal mining. Furthermore, its diversification to gold mining and infrastructure will help create a more balanced portfolio. In terms of agribusiness, we remain optimistic on its outlook due to strong CPO prices on the back of global recovery, supply constraint, rising oil prices, and biodiesel policy. With regard to infrastructure, ASII will continue investing in toll roads mainly Trans Java following improving traffics, interconnectivity, and infrastructure development. For property, Astra is expanding into warehousing business in line with lucrative outlook of e‐commerce and FMCG. Meanwhile, ASII has implemented strategic initiatives, namely 1) maintaining leadership position; 2) expanding core business while accelerating digitalization by investing in startups; 3) diversifying into new segments that synergize with existing businesses and ESG‐compliant. Astra is exploring new business opportunities in digital and technology, financial services, healthcare, logistics, renewable energy, as well as non‐coal mining. Reiterate BUY on the back of economic recovery and diversification We maintain our BUY recommendation with a higher DCF‐based price target of Rp8,500 per share. The stock is currently traded at a 2022 PER of 12.4x and PBV of 1.6x. We are buoyant with ASII’s outlook, driven by 1) economic recovery along with fiscal stimulus; 2) innovative and well‐accepted products; 3) soaring commodity prices; 4) infrastructure acceleration; 5) continued investments in gold mining and digitalization; as well as 6) solid balance sheet to finance expansions. However, we note several downside risks to our call, namely 1) stiff competition in automotive market that may result in margin pressures; 2) risks of interest rate hikes, Rupiah depreciation, and asset quality deterioration; as well as 3) lower‐than‐expected coal and CPO prices.