ASII - Standing tall despite challenges

• ASII’s 1H22 core profit rose 63.8% YoY to Rp14.46tn, representing 58.6% of our FY forecast 

• We expect domestic 4W and 2W sales of 960K units and 4.8mn units, respectively in 2022, amid increasing purchasing power, low interest rates, and tax waiver. Astra has raised prices amid soaring raw material costs. Higher amount financed and asset quality will improve financial services, while surging coal and CPO prices will boost HEMCE and agribusiness 

• Reiterate BUY with 31.3% 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 

Exceeding expectations Excluding fair value gain on investment in GOTO, ASII’s net profit surged 63.8% YoY to Rp14.46tn in 1H22, accounting for 58.6%/55.7% of our/consensus FY estimates. This robust result was mainly driven by stellar performance of heavy equipment, mining, construction and energy (HEMCE), automotive, as well as financial services. Net profit of automotive rose 29.0% YoY to Rp4.27tn in 1H22 as Astra’s 4W sales escalated 23.4% YoY, while 2W sales declined 13% YoY due to production constraints amid semiconductor shortage. For financial services, net profit went up 36.0% YoY to Rp2.90tn in 1H22 on the back of higher contribution from consumer finance. Furthermore, net profit of HEMCE jumped 131.0% YoY to Rp6.19tn in 1H22, boosted by strong heavy equipment sales, mining contracting, and coal mining in line with soaring coal prices. In terms of agribusiness, net profit increased 24.8% YoY to Rp645bn in 1H22 as average CPO price rose 46% YoY to Rp15,023/kg, despite lower CPO and derivative product sales by 32% YoY to 635K tons, caused by export ban in 2Q22. Moreover, net profit of infrastructure and logistics skyrocketed 287.9% YoY to Rp353bn in 1H22 amid toll road business improvement. Encouraging signs of auto recovery ASII’s 4W sales increased 23.4% YoY to 258,849 units, compared to 4W sales nationwide that grew 20.8% YoY to 475,321 units in 1H22. As a result, Astra’s market share edged up from 53.3% in 1H21 to 54.5% in 1H22. We maintain our domestic 4W sales assumption of 960K units this year, driven by 1) economic recovery; 2) low interest rates; and 3) luxury‐goods sales tax exemption. However, we view that headwinds will come from 1) aggressive monetary tightening; 2) Rupiah depreciation; and 3) global supply chain disruption. To anticipate soaring raw material costs, the company has raised selling prices, while conducting cost management optimization. Amid semiconductor shortage, ASII is utilizing multi‐sourcing strategy with principal supports. Furthermore, Astra strives to retain at least 50% market share by rolling out new models. Nevertheless, we see that competition will remain intense following the launches of LMPV models from other players. Meanwhile, ASII’s 2W sales decreased 13% YoY to 1.6mn units, while domestic 2W sales declined 8% YoY to 2.2mn units in 1H22, mainly caused by microchip shortage. We expect national 2W sales to reach 4.8mn units this year, supported by improving purchasing power and surging commodity prices. Strong support from non‐auto segments We believe financial services to improve this year in line with higher amount financed on the back of growing vehicle sales coupled with better asset quality. In the midst of aggressive global interest rate hikes, Astra will manage to maintain CoF by diversifying sources of funding from domestic and overseas. The company will continue to take prudent approach by setting aside sufficient provision to anticipate uncertainties. For HEMCE, we estimate that soaring coal prices amid strong demands due to tight energy supply 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 business portfolio. In terms of agribusiness, we view that its outlook will be relatively solid in line with strong CPO prices on the back of rising oil prices and biodiesel policy. However, palm oil export levy waiver until August and export ban lifting will limit further price hikes. Following economic recovery and transformation, ASII will develop new business lines, targeting healthcare, technology, digital banking, renewable energy, and non coal mining segments. Reiterate BUY on the back of economic recovery and diversification We maintain our BUY recommendation with a DCF‐based price target of Rp8,500 per share. The stock is currently traded at a 2022 PBV of 1.4x and PER of 8.4x, translating into 0.9stdev below its 5‐year historical mean, which we consider to be relatively undemanding. We remain 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, digitalization, and renewable energy; as well as 6) solid balance sheet to finance expansions. However, we note several downside risks to our call, namely 1) global economic slowdown; 2) stiff competition in automotive market that may result in market share erosion and margin squeeze; 2) rising inflation, interest rate hikes, Rupiah depreciation, and asset quality deterioration; as well as 3) lower‐than‐expected coal and CPO prices.