Jardine Cycle & Carriage - DBS Research 2018-05-18: A Southeast Asian Proxy

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JARDINE CYCLE & CARRIAGE LTD SGX: C07

Jardine Cycle & Carriage - A Southeast Asian Proxy

• Jardine Cycle & Carriage (JCC), a member of the Jardine Matheson Group, offers unique exposure to Southeast Asian economies and diversified industries.
• JCC owns a 50.1% strategic stake in Astra International, the largest independent automotive group in Southeast Asia.
• Key risks: Exposure to underlying economic and political risks in Southeast Asia; increasing competition; commodity price fluctuations and currency risks.

The Business

Jardine Cycle & Carriage (JCC) offers unique exposure to Southeast Asian economies.

• Jardine Cycle & Carriage (JCC), a member of Jardine Matheson Group, together with its subsidiaries and associates, employs over 250,000 people across Indonesia, Singapore, Malaysia, Myanmar, Thailand and Vietnam, offering unique exposure to key Southeast Asian economies.
• JCC has a strategic 50.1% stake in Astra International (Astra), the largest independent automotive group in Southeast Asia. JCC also has a strong regional automotive presence through its Direct Motor Interests operating in Singapore, Malaysia, Myanmar and Vietnam. Through Astra, JCC is exposed to a variety of industries including financial services, heavy equipment, mining, construction and energy, agribusiness, infrastructure & logistics, information technology and property.
• JCC also offers exposure to Thailand and Vietnam through its Other Strategic Interests, namely Siam City Cement, Refrigeration Electrical Corporation and Vinamilk, market leaders in their respective industries.

Diversified earnings base with exposure to Vietnam.

• Jardine Cycle & Carriage (JCC) has a diversified earnings base in terms of industries and geographical exposure which offers exposure to Vietnam, one of the fastest-growing economies in Southeast Asia. JCC owns an increasing portfolio of Vietnam companies which are market leaders in their respective fields, including a 24.65% stake in Refrigeration Electrical Corporation (REE), a provider of mechanical and electrical engineering services in Vietnam; 25.1% in Truong Hai Auto Corporation (THACO), the largest automotive company in Vietnam, and most recently a 10% stake in Viet Nam Dairy Products Joint Stock Company (Vinamilk), the largest dairy company and leading nutrition group in Vietnam reaching more than 31 countries. In FY2017, c.10% of underlying net profit was attributed to Vietnam.
• Relative to Astra International, JCC represents an inexpensive entry into Astra International through its strategic interest in Astra International as it currently trades at a c.12% trailing twelve months (t.t.m.) P/E discount compared to Astra International. Over the last 10 years, JCC trades at an average of c.14% t.t.m. P/E discount to Astra International. The stock is currently trading at forward P/E of 11.1x (based on consensus estimates).

Management

• JCC’s management team has extensive experience across the Jardine Matheson Group, led by Benjamin Keswick, Chairman; Alexander Newbigging, Group Managing Director; Adrian Teng, Group Finance Director; and Cheah Kim Teck, Managing Director, Business Development.

Share Price Drivers

• Historically, JCC’s share price has been highly correlated to Astra’s share price, which tracks CPO prices and vehicle sales volume to a large extent.

Dividend Payout

• JCC’s dividend payout ratio averaged c.43% in the last three years. In FY2017, JCC paid 86 UScts of dividends per share, representing c.3.5% dividend yield at its current share price.

Key Risks

• Astra contributed c.80% of JCC’s underlying profit in FY2017 (FY2016: c.71%). Astra's earnings remain a strong contributor to JCC’s underlying profit over the years, though its contribution has declined against increasing contribution from JCC’s direct motor and other strategic interests. Increasing competition is a key risk for Astra's automotive segment. 
• JCC is also affected by commodity prices (crude palm oil [CPO] and coal) and interest rates hikes which affect Astra's financial services, heavy equipment, mining, construction and energy businesses.

Business Segment

• The group has three main business segments:
  1. Astra International (Astra)
  2. Direct Motor Interests
  3. Other Strategic Interests

(1) Astra International.

• Listed on the Indonesian Stock Exchange with a market capitalisation of c.Rp280tr, Astra contributed to c.80% of the group’s underlying profit in FY2017. Within Astra, the automotive segment, which distributes Toyota and Daihatsu cars and Honda motorcycles, is the key earnings driver.
  1. Automotive. Astra owns the entire automotive value chain, ranging from automotive and component manufacturing, distribution and sales network and after-sales services throughout Indonesia, car rental, used-car sales, consumer finance for automotive products, insurance and infrastructure. Astra has forged partnerships with various reputable brands, including Toyota, Daihatsu, Isuzu, BMW, Peugeot and UD Trucks. Astra accounts for 48% and 77% of Indonesia’s car and motorcycle market share in February 2018 respectively. Astra’s subsidiary, PT Astra Otoparts Tbk (AOP), which manufactures and distributes a large variety of automotive component products for domestic and international markets, is listed on the Indonesian Stock Exchange separately with market capitalisation of c.Rp8tr. 
  2. Financial services. Astra provides a variety of financial services in support of its automotive businesses and sales of heavy equipment, including car financing through Astra Credit Companies (ACC) which includes PT Astra Sedaya Finance, PT Swadharma Bakti Sedaya Finance, PT Astra Auto Finance, PT Staco Estika Sedaya Finance and PT Pratama Sedaya Finance, and PT Toyota Astra Financial Services (TAFS), Honda motorcycle financing through PT Federal International Finance (FIF), heavy equipment credit through PT Surya Artha Nusantara Finance (SANF) and PT Komatsu Astra Finance (KAF). Separately, PT Asuransi Astra Buana (AAB) and PT Astra Aviva Life offer general insurance. Astra and Standard Chartered Bank each own a 44.56% stake in PermataBank, which is listed on the Indonesian Stock Exchange with market capitalisation of c.Rp14tr. PermataBank is one of the top 10 banks in Indonesia by assets, with business focus on the commercial and consumer segments and a strong base in the small and medium enterprise (SME) business. 
  3. Heavy Equipment, mining, construction and energy. Astra has three main business activities in this segment, namely construction machinery, mining contracting and coal mining, which are managed under its subsidiary PT United Tractors Tbk (UT), listed on the Indonesian Stock Exchange with a market capitalisation of c.Rp130tr, which is 59.5% owned by Astra. UT is the sole distributor in Indonesia for heavy equipment brands such as Komatsu, UD Trucks, Scania, Bomag, Komatsu Forest and Tadano. 
  4. Agribusiness. Astra owns 79.7% of PT Astra Agro Lestari Tbk (AAL), one of the largest and most integrated palm oil businesses in Indonesia. AAL is listed on the Indonesian Stock Exchange with market capitalisation of c.Rp23tr. 

(2) Non-Astra Direct Motor Interests.

• JCC’s direct motor interests have presence across Singapore, Malaysia, Myanmar, Indonesia and Vietnam. 
  • Singapore. In Singapore, the motor business is operated via 100%-owned subsidiary Cycle & Carriage Singapore, which is engaged in the distribution, retail and after-sales service of Mercedes-Benz, Mitsubishi, Kia, Citroën passenger cars and commercial vehicles, as well as DS Automobiles passengers. 
  • Malaysia. In Malaysia, the motor business is operated via Cycle & Carriage Bintang, a 59.1%-owned subsidiary listed on Bursa Malaysia with a market capitalisation of c.RM200m. It is the largest dealer of Mercedes-Benz motor vehicles in Malaysia, providing sales and after-sales services for Mercedes-Benz passenger cars and commercial vehicles. 
  • Myanmar. In Myanmar, 60%-owned subsidiary Cycle & Carriage Myanmar distributes, retails and provides after-sales services for Mercedes-Benz and Mazda passenger cars and commercial vehicles, as well as Fuso commercial vehicles. 
  • Indonesia. In Indonesia, JCC has a 45.1% stake in Tunas Ridean, one of the leading automotive dealer groups in Indonesia which represents Toyota, Daihatsu, BMW and Isuzu motor vehicles, as well as Honda motorcycles. Tunas Ridean also offers automotive rental and fleet management services, and vehicle financing through its associate, Mandiri Tunas Finance. Tunas Ridean is listed on the Indonesian Stock Exchange with market capitalisation of c.Rp7tr. 
  • Vietnam. JCC’s has a 25.1% stake in Truong Hai Auto Corporation (Thaco) which is one of the largest automotive companies in Vietnam. Thaco manufactures, assembles, distributes, retails and provides after-sales services for commercial and passenger vehicles, representing BMW, MINI, Kia, Mazda, Peugeot, Foton and Fuso. Separately, Thaco runs a property development business in Vietnam. 

(3) Other Strategic Interests.

• Apart from its direct motor interests in various Southeast Asian economies, JCC is a long-term and engaged shareholder with exposure to Thailand and Vietnam via its strategic stakes in Siam City Cement (SCCC), Refrigeration Electrical Engineering (REE) and Vinamilk (VNM). 
• In FY17, they collectively contributed c.4% of underlying profit before withholding taxes and corporate costs. 
  1. Refrigeration Electrical Engineering. JCC has a 24.7% stake in REE which is listed on the Ho Chi Minh Stock Exchange among the top 30 largest companies (market capitalisation), with a market capitalisation of c.US$500m. REE is a diversified business group with operations in mechanical and electrical engineering services, real estate, and power and water utility infrastructure. Alexander Newbigging, Group Managing Director, has been serving as Non-Executive Vice Chairman of REE since 2013. In FY17, REE saw broad-based revenue and profit growth across the segments with strong orderbook for M&E, contributions from property sales of VIID and SaigonRes, higher dividend income from power investment portfolio, as well as new contributions from a 35% stake in a water treatment plant. 
  2. Siam City Cement. JCC has a 25.5% stake in SCCC, the second largest cement manufacturer in Thailand with operations across South and Southeast Asia. SCCC, which also produces concrete and other building materials, is listed on the Stock Exchange of Thailand with a market capitalisation of c.US$2bn. Notably, JCC participated in SCCC’s rights issue in May 2017. Alexander Newbigging, Group Managing Director, and Adrian Teng, Group Finance Director, have been serving as Directors of Siam City Cement since 2015 and 2016 respectively. 
  3. Vinamilk. JCC has acquired a 10% stake in Vietnam DairyProducts Joint Stock Company (Vinamilk, VNM), the largestdairy company in Vietnam, over multiple transactions inNovember 2017. VNM is listed on the Ho Chi Minh StockExchange with a market capitalisation of c.US$11bn. It is theleading dairy producer in Vietnam with a market share of c.58%, operating 13 dairy factories, 10 farms and has one of the strongest distribution networks in Vietnam with more than 240,000 retailers as exclusive distributors. VNM contributed S$9.3m to JCC’s underlying profit in FY17 with the declaration of an interim dividend in December 2017. VNM typically approves a dividend payout ratio of at least 50% of NPAT at its Annual General Meeting and paid out c.50% of NPAT in FY2017.

NOT RATED
Target Price: N/A

Rui Wen LIM DBS Vickers | https://www.dbsvickers.com/ 2018-05-18

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