United Motors Lanka PLC Equity ResearchUnited Motors Lanka PLC is a licensed importer and...
Transcript of United Motors Lanka PLC Equity ResearchUnited Motors Lanka PLC is a licensed importer and...
LOLC SEC ValuationShare PriceUpside/(Downside)Risk Level(refer page 22 for recommendation)
Share Details
Bloomberg Ticker UML SL
CSE Sector Motor
GICS Sector Consumer Discretionary
Market Cap (LKR Mn) 9,868
Issued Quantity (Mn) 101
30-day avg T/O (LKR Mn) 0.88
Beta (6 months) 1.02
Investment Fundamentals
LKR Bn 12MTrail. 2016(F) 2017(F) 2018(F)
Revenue 11.07 14.83 17.95 19.96
Net Profit 1.42 1.62 2.09 2.66
S/H's Equity 10.44 11.41 12.66 13.99
Total Assets 13.15 14.90 16.81 18.62
ROA (%) 12 11 12 14
ROE (%) 15 14 17 19
Price MultiplesPE (X) 6.95
PBV (X) 0.95
Price to Sales (X) 0.89
Divdend Yield (%) 6.13
Price Behavior
Per Share Details as at 30.06.2015 (LKR)
Earnings per share (trailing 12m) 14.08
Net Asset Value per share 106.53
Sales per share (trailing 12m) 109.75
Dividend Per Share (trailing 12m) 6.00
Business Nature
Shareholder Details
Yaseen M A 61%
Yaseen R R 11%Chrysostom S M 7%
Shareholders below 5% 21%
Source:CSE, Bloomberg, LOSEC Research
Analyst (s)
Gayan Rajakaruna
01 October 15
Recommendation Guidance, Important Disclosures and Analyst Certification: Page 22
Salient Sections of the Report
Motor sector to rise up with increase in per capita income (pg.2)|Mitsubishi continues to be a
dominant player (pg.4)|Strong agency model to attract strategic brands (pg.5)|Diversified
product portfolio (pg.8)| Strength in value chain (pg.9)|Strong balance sheet (pg.10)| Flexible
on changes in macro-economic variables (pg.11)| Valuation (pg.12)|Sensitivity (pg.13)|
Earnings risk comment (pg.13)|Appendices (pg.14 ) +94 117 880837
Investment Considerations
Motor sector to grow with GDP per capita rise and consumption expenditure growth:
We expect motor sector to be one of the fastest growing sectors in the Sri Lankan economy in
short to medium term. Transition through mid-income economy and low vehicle penetration
are expected to create a strong demand for motor vehicle purchases.
Mitsubishi continues to be a dominant player: UML is the sole distributor of brand new
Mitsubishi passenger and commercial vehicles and has been able to consistently maintain a
strong market share (>24% of brand new Japanese units imported) during last 9 years
despite of competition from other brands. Mitsubishi is one of the oldest and leading global
automotive player and is familiar, trusted name amongst Sri Lankans, giving a competitive
advantage for UML to stand above the competition.
Strong agency model to attract strategic brands to country: Apart from the strategic
connection with Mitsubishi, UML has been able to timely introduce strategic brands such as
Perodua, DFSK, JMC and TVS to capture a notable market share by utilising its cost effective
and efficient agency model.
Diverse product portfolio with wider brand spread: UML has the most diversified product
and brand portfolio over its sector peers which enables it to mitigate risk on dependence on
one product from external fiscal shocks.
Strength in value chain: UML has strengthened its presence in motor sector value chain
through vehicle assembly operation, reputed after-sales service operation and related
diversification into products such as lubricant oil and tyres.
Strong balance sheet to provide convenient funding options: UML has consistently
maintained near zero long-term debt position over the last 5 years and hence can
conveniently leverage up for prospective investment opportunities.
Valuation
We assume a cost of equity of 15% for our valuation which is a 7% premium on 3 year
treasury bond rate(GOSL), taking into consideration the equity market risk and industry
volatilities. Accordingly, We have valued the counter using FCFE model and derived the value
of a share at LKR 144.00. At the current value, counter is trading at a discount to our
valuation. We give a Buy recommendation for UML.
United Motors Lanka PLC
Initiation Coverage
BUY
United Motors Lanka PLC is a licensed importer and
distributor of motor vehicles. It markets a range of
automotive products, from top-end luxury vehicles to three-
wheelers and motor bikes, and from car parts to lubricants
and tires.
LKR 144.00LKR 97.80
Medium47.24%
Robust Agency Model tapping consumption growth
We expect affordability of vehicle ownerships to grow up in tandem with expected per capita
income rise in Sri Lanka. UML is positioned well to benefit on consumption growth, given its
strong product portfolio backed by Mitsubishi and the robust agency model over its peers.
UML's efficient trading model and capabilities in vehicle assembling will also enable it to
respond for frequent market changes while UML can conveniently leverage on its strong
balance sheet for further expansions.
Equity Research
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100105110115120
01-Oct-14 01-Jan-15 01-Apr-15 01-Jul-15 01-Oct-15
LK
R
UML Share Price ASI movement (adjusted to UML base price)
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Graph 1: Correlation of GDP per capita and vehicle population Graph 2: Correlation of GDP per capita and vehicle registration
Consumer Discretionary
Source: Dept. of Motor Trafic, LOSEC estimates Source: Dept. of Motor Trafic, LOSEC estimates
Graph 3: Correlation of GDP growth and consumption exp. Graph 4: Transport expenditure increasing over last 5 years
Source: CBSL, LOSEC estimates Source: CBSL, LOSEC estimates
Table 01: Correlation of different variables
Source:CSE, Bloomberg, LOSEC Research VariableGDP per capita and vehicle population 0.99 Strong positiveGDP per capita and new vehicle registration 0.68 PositiveGDP per capita and transport expenditure 0.98 Strong positiveTotal private consumption and transport expenditure 0.99 Strong positive
2 | LOLC Securities Limited
Cofficient of Correlation Correlation
Motor sector to rise up with increase in per capita income and consumption expenditure growth
Total vehicle population of the country has climbed up to 5.6 million in 2014 while posting a strong correlation
between growth of vehicle population and per capita income over the last ten years. Accordingly, we expect Sri
Lankan economy to show a strong growth in the future despite of the short term volatility, and vehicle population to
hit 7.5 million by end of 2017.
By end of 2014, new vehicle registrations increased by 31.5% YoY while 1H2015 registrations posted a 90% YoY
growth adding a 314,155 vehicles to the country. Despite certain historic vehicle volume dips largely due to import
duty changes, the records indicate that the new vehicle registrations have posted a 13% CAGR during the last decade,
qualifying to form a positive correlation with per capita income rise over the same period.
Sri Lankans will spend
more on vehicle
purchases
Sri Lanka’s private consumption expenditure has also expanded over the last five years while posting a 15% CAGR by
2014 with consequent to rise in per capita income. Transport expenditure accounts for over 20% of annual
consumption expenditure in Sri Lanka since 2008 and has become the second largest category after spending on food
and beverage.
Being a key component of total consumption expenditure, transport expenditure over the last five years demonstrate
a strong correlation with rising per capita income signaling that the expenditure on transport is likely to increase
proportionately with the anticipated increase in per capita income thus resulting an increase in demand for motor
vehicles. Therefore growth in the private consumption will bode well for the increase in demand of passenger
vehicles, motor cycles and three wheelers offered by UML in years ahead.
Total vehicle population
will hit 7.5mn by 2017
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LKR Bn LKR
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source: Worldbank Source: Worldbank
Source: Dept. of Motor Trafic, LOSEC estimates
Source: CBSL, LOSEC estimates
2 | LOLC Securities Limited 3 | LOLC Securities Limited
Low motor vehicle penetration and vehicle density
Graph 5: Motor Vehicles per 1000 people** Graph 6: Vehicles per 1 km
Apart from the macro economic outlook, Sri Lanka's vehicle penetration (vehicles per 1000 people) and vehicle
density (vehicles per one kilometre) are relatively low compared to regional peers. Therefore, we believe that the
sector has a potential to grow along with the targeted per capita growth and the extension of road network.
** Motor vehicles include automobiles, SUVs, trucks, vans, buses, commercial vehicles
and freight motor road vehicles but do not include two/three-wheelers. Population
refers to midyear population in the respective year.
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Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates
Source: Annual Report,Dept. of Motor Trafic Source: Annual Report,Dept. of Motor Trafic
3 | LOLC Securities Limited 4 | LOLC Securities Limited
PHEV will outperform as
Mitsubishi being the first
to introduce this
technology to SUVs
Graph 7: UML will maintain minimum 27% market share of Mitsubishi
Graph 9: FY15/16 looks positive for Mitsubishi SUVs
UML has been able to consistently manage its market share of Japanese brand new vehicles over 24% since 2006
except in 2011 signalling its strong presence in the local vehicle market. Considering the average historical market
share combined with the planned investments on brand building and marketing initiatives, workshop and facility
upgrading and new product launching, we estimate that UML to maintain minimum 27% market share in the next
three years.
Mitsubishi continues to be a dominant player in Sri Lankan motor sector
We believe that the SUV sales will be rebounded to average sales volumes during FY15/16 with the introduction of
“Mitsubishi Outlander Plug-in Hybrid Electric Vehicle (PHEV) during the latter part of the last year. With growing
demand for fully and hybrid electric vehicles due to its fuel efficiency, PHEV is expected to be the next growth product
of luxury vehicle segment. However, the growth prospect of PHEV could be faltered in the present context due to lack
of island-wide coverage of electric charging posts, excessive demand for the existing charging points in Colombo and
limited mileage capacity associated with electricity based driving.
UML is the sole distributor of Mitsubishi passenger and commercial vehicles in Sri Lanka and holds a 28% market
share of the total Japanese brand new vehicle imports by FY14/15 while controlling 9% of the total vehicle market.
Mitsubishi Motor Company (MMC) of Japan has consistently maintained its position as a leading automotive brand in
the world for its products’ quality, performance and price affordability enabling UML to leverage the popularity of
Mitsubishi brand in the local market. Further, with the exclusive distribution right of brand new Mitsubishi vehicles,
UML would face less competition in brand new Mitsubishi vehicle segment.
UML has been tapping high end luxury vehicle segment through its flagship SUV “Mitsubishi Montero” since 1998.
Montero attracts high income people who seek a luxury vehicle with a strong brand name which goes along with their
standard of life and has now become a trusted name amongst high end business community and professionals.
Affluent Sri Lankans prefer to use brand such as “Montero” or “Prado (by Toyota)” to express their status quo. This
social perception has created a strong leverage for UML to position itself in the high end vehicle segment over its
competitors.
Mitsubishi Montero is a
household name in Sri
Lanka to represent the
status quo of wealthy
people
Graph 8: Mitsubishi SUV will continue to be a dominant
product with strong market share
Proving the success story of Montero, UML has been able to sell approximately 4,777 SUVs registering above 15%
share over last 4 years. However, SUV sales in FY14/15 had a decline largely due to tapering off the vehicle permit
schemes which was granted for state employees to import brand new vehicles and the absence of a hybrid vehicle in
its product portfolio to leverage on the booming hybrid vehicle market conditions arising out of lower import duties
of this category. However this downside impact has been negate to a certain extent via increased demand for
“Mitsubishi Outlander” due to its technical sophistication and reduced pricing compared with Montero.
UML will leverage on
Mitsubishi brand
Mitsubishi vehicle and
spare part sales account
for 69% of Group's
topline
10%
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45%
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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(F)2016(F)2017(F)
Mitsubishi share
Brand new Japaneseunits imported(excl.Mitsubishi)
Market share%
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its
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Units
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020406080
100120140160180200220240
Jan Feb Mar Apr May Jun Jul Aug
2014 2015 MoM Growth
SUV registrations has improved between 2014 and 2015 MoM
Units
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates
Source: Annual Reports
Success story of Perodua reflects UML's strong agency model
Source: Annual Report,Dept. of Motor Trafic
4 | LOLC Securities Limited 5 | LOLC Securities Limited
Perodua Axia is now
ready with advanced
features and competitive
prices for the next sprint
Graph 10: UML has been able to make strategic decisions to gain on growth phases of the economic cycle and secure on
motor sector challenges
Strong agency model to attract strategic brands to country
UML was able to recognize Malaysian brand Perodua as a good and affordable product for small car market and
introduced its first Malaysian product to local market in 1997. With the introduction of 'Perodua Viva' in 2008, the
company achieved a remarkable success in this segment during last five years while transforming the relatively
unknown Malaysian brand to a well-known more demanding car product in the local market. UML was successful in
reaping the tax advantage emerged in 2010 and sold over 4400 Perodua cars in 2011 while capturing a significant
market share of the same. Due to its availability and marketability backed with strong after sales services, Perodua
Viva sales were very impressive in previous years despite significant increase in taxes in 2012, till the manufacturer
decided to halt the production of the car in 2H2014.
Perodua Viva had a significant downfall in 1H2015 since UML was unable to timely capitalize the tax reduction in
small cars due to the manufacturer's delay in supplying a successor to 'Perodua Viva'. However UML has now
managed to offer 'Perodua Axia' for the small car market (<1000cc) which has seen a significant growth potential
under low tax environment. 150 Perodua Axia cars have been registered for the last two months and we estimate a
moderate sales volume of 500 units in FY16 and 1000, 1100 units respectively in FY17 and FY18 and anticipate a
drop in volumes due to probable import duty changes in this category in coming years.
Strong agency model that
exists within UML makes
it difficult for competitors
to penetrate into
UML was able to secure Mitsubishi dealership during its early days which led the company to create an edge over
competition as a trading business. The connection which has been built with Mitsubishi over the years has now
enabled UML to have a cost effective and efficient trading model which will place UML ahead amongst other vehicle
importers. Further, while maintaining close ties with Mitsubishi UML has also shown its capability in bringing other
strategic brands such as Perodua, DFSK, JMC, TVS and MG to the country in a timely manner and capturing the market
share within a short span of time.
Historically, the management of UML has been capable of introducing right brands/ products to the local market in a
timely manner in order to strategically respond to challenges stemming from ever changing import duties and other
macro-economic variables (interest rates, exchange rates, fuel prices). We believe that given its strong relationships
with principles, UML will continue to follow the same strategy by keeping the right vehicles ready to be marketed
upon changes taking place in import duty structure.
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2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-Aug
New
veh
icle
reg
istr
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Reduced taxes and fasteconomic growth leading to rapid expansion in motor sector
No excise duty levied by Gvt. on assembled vehicles making them half the price of imported ones
Reduced taxed on hybrid vehicles and electric vehicles
Reduced taxes on small cars, reduced fuel prices and increased per capita income leading to a growth in vehicle registrations of motor cars, motor cycles
- Introduction of local assembly facility to capture increased demand of SUVs by permit holders
- Launching TVS King three wheelers
- Introduction of Mitsubishi Outlander and increased supply of Perodua Viva to gain from reduced taxes (35% reduction in cost of passenger vehicles)
- Added new Mitsubishi Montero to capitalize increasing demand from permit holders
- Introduction to DFSK mini truck to gain on tax advantage
- Launching TVS Vego scooters to respond to growing demand of motor cycles
- Commencing assembly of vehicles with Chinese origin
- Added Mitsubishi PHEV to seize tax benefits on hybrid vehicles
- Introduction of Perodua Axia due to increased demand on small vehicles emerged due to tax reduction in interim budget 2015
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
(***single cab category includes mini trucks and cab shaped vehicles)
Graph 13: UML has better gross profit margins over peers Graph 14: UML's operating margins are above the peers
Source: Bloomberg Source: Bloomberg
5 | LOLC Securities Limited 6 | LOLC Securities Limited
Graph 11: Perodua Viva/Axia demand growth Graph 12: UML expects a growth in DFSK market share
High performer amidst market disruptions - DFSK Unimo Lokka
MG Brand, a new segment
Strong agency model to attract strategic brands to country (cont…)
UML's relationship with
SAIC
Another strategic brand 'DFSK Unimo Lokka', a small commercial truck specifically developed for Sri Lankan terrain
was introduced to the market in 2011. Despite a disproportionate tax structure made available to DFSK in 2H2013
and also being a new and unknown brand competing against established ones, Unimo Lokka has been able to capture
10% of the small truck market within just 20 months of its market entry.
DFSK sales volume saw a dip in 2014 after increase in duty. However with reinvestments in brand building and
emphasize on its specific value proposition, approx. 807 units have been sold in Jan-Aug 2015 providing a good
indication about its marketability in the local market. In last six months, it has sold about 110 monthly average of
DFSK trucks while a consistent market share has also been maintained over last 4 years. With these impressive track
records fueled by strong after sale services along with continuous introduction of new models to its portfolio, we
estimate around 1300 units to be sold in FY16 with 10% YoY growth for following two years while ongoing tax issue
also taking into consideration.
UML launched Morris Garages (MG) in 2014 as a luxury sport car model and introduced the automatic version of it in
2015 to fill the gap of this segment. While UML looks forward to expand the product portfolio into larger sedan
category through MG model despite the product being in the early stage of the life cycle, UML has an agency
relationship with a large player such as SAIC Motor Corporation, one of the big four Chinese automakers who has
introduced MG to UML.
UML to leverage on cost efficient trading model
UML has been able to consistently maintain gross and operating margins above the peers indicating its ability to
efficiently manage the cost side of the business.Higher GP and Operating
margins
DFSK plans to capture
10% market share in
single cab category
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Units
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DFSK Mini truckNew registration of 'single cabs' category***Market share
Units
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UML DIMO COLOASHO SMOT AUTO
%
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UML DIMO ASHO SMOT AUTO
%
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
Graph 15: Market share of TVS motor cycles above 10%
Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
Graph 17: Financial forecast of TVS Lanka
Source: Annual Reports, LOSEC estimates
6 | LOLC Securities Limited 7 | LOLC Securities Limited
Strong agency model to attract strategic brands to country (cont…)
Considering last 6 months' TVS motor cycle registrations, we estimate about 32,000 units to be sold for FY16 with
20% YoY volume decline subsequently due to possible changes in duty structure along with shifting peoples' buying
sentiment from 'two wheel drive' to a small car in par with expected increase in spending. However we believe TVS
motor cycles to increase its market share from 10% to 13% in future years due to product quality and aggressive
branding strategies.
3-wheeler market has seen a rapid growth in early 2000 and saw a growth decline in 2012-2014 due to market
saturation combined with unfavorable import duties. However, we expect a moderate market growth in the coming
years considering increasing usage and relatively shorter churning period of commercial 3-wheelers. Accordingly, we
would estimate a moderate figure of 7000 units for FY16 taking last 6 months' registrations in to account. Our
estimate will entail a 10% YoY decline on following years due to possible import duty changes.
UML carries TVS in its book at LKR 632 million. We expect TVS to continue with the growth momentum supported by
the increase in per capita income and to generate a return with an average of 10% ROE for next three years. However
we believe that TVS is capable of improving its net profit margins over the time by reducing the burden on heavy
promotional expenses due to being the early stage of business cycle and improving distribution channels enabling to
cut down related operational expenses.
Shorter churning period
(approx. 6 years) of 3-
wheelers will augur well
with market growth
prospects
We estimate TVS to
generate an average 10%
ROE
TVS, the growth star
Graph 16: Market share of TVS 3-wheelers growing
UML is trading motor cycles and three wheelers along with spare parts through TVS Lanka, a joint venture between
United Motors, T.V. Sundaram Iyengar & Sons and TVS Motors of India with a 50% stake owned by UML. Starting
business in 2003, the company has been able to position itself well in a competitive market while capturing a
significant market share in both segments during last 5 years. The company strategy seems to be aligned well with
per capita income growth witnessed in the country which led to emerge a high income middle class with a strong
purchasing power of buying cycles and three wheelers.
Despite of experiencing volume dips in 2012, TVS has been able to consistently maintain its market share in two
wheeler segment above 10% while seeing a consistent growth of the market share in three wheeler segment in the
past. Despite having low net profit margins relative to the high top line of the company due to thinner gross margin
from each unit of sale, management seems to be continuously working on improving volumes via major promotions
along with a strong focus on sales and after sales channel development.
TVS has done volumes…
……...but experiences
thinner margins
25,000 35,466
15,840 18,000 21,839 24,523 32,000 25,600 20,480
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New motor cycle registrations TVS motor cycle sales Market share
Units Market share
10,381 3,656 2,761 4,028 5,320 7,000 6,650 6,318
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New 3-wheeler registrations TVS 3-wheeler sales Market share
Units Market share
11 44 124 159 149 140
0%1%2%3%4%5%6%7%8%9%10%11%12%
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2013 2014 2015 2016(F) 2017(F) 2018(F)
Revenue PAT Net profit margin ROE
LKR Mn
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Diverse product portfolio with wider brand spread
Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates
Source: UML website
Diagram 2: UML has wider product offering over sector peers
Source: Annual Reports
Source: Annual Reports, LOSEC estimates
7 | LOLC Securities Limited 8 | LOLC Securities Limited
Apart from the pivotal role played by “Mitsubishi” in UML's brand portfolio, the company has become a home to 12
other world leading brands pertaining to motor vehicles, two wheelers and three wheelers, car care products,
lubricants and tyres. This brand composition over its peers will benefit the company from greater consumer
preference towards wider array of established brands.
Leading brands make
UML to become closer to
customers
We believe that the product diversity will enable
UML to off set losses which could be incurred on
the respective products due to unexpected fiscal
policy changes such as import duty rates.
Further, we believe that UML will continue to focus
on introducing different vehicle categories/models
such as mid-range passenger cars with auto-
transmission, commercial and special purpose
vehicles and much discussed electric vehicles in
years to come.
Diverse product portfolio
enables UML to offset
possible losses stemming
from unfavorable import
duty changes
UML markets a range of automotive products, from
top-end luxury vehicles to three-wheelers and
motorbikes, and from car parts to lubricants and
tires, thus has consistently developed its portfolio
to serve the widest possible market base across Sri
Lanka.
UML’s diverse vehicle portfolio currently offers
cars, SUVs, dual purpose vehicles, trucks, busses,
motor cycles and three-wheelers in order to
address varying customer needs of the market.
When compared with sector peers, UML stays well
ahead with the diversity and quality of their
product offering which is always backed by the
diversity of Mitsubishi Motors Japan. Therefore the
company has been able to maintain a strong
foothold amongst Sri Lankans who opt to consider
the name 'United Motors' for a purchase of brand
new commercial or personal vehicle.
Diagram 1: UML’s Product Offering
JMC Crew Cab JMC Cargo Truck JMC Full Body JMC Freezer Truck
Axia
Montero Montero Sport Outlander ASX Phev
Delica D5 DFSK 27 Brilliance H1 Brilliance H2L
Fuso Light Duty
(Canter Trucks) Fuso Medium Duty
(Canter Trucks) Fuso Heavy Duty
(Canter Trucks)
Fuso Medium Duty Fuso Heavy Duty
Lancer Ex Mirage Attrage MG
Unimo Lokka
Fuso Bus
L 200 - Single Cab
(4WD/2WD) L 200 - Double Cab
(4WD/2WD)
Sportero N300 Single Cab
(2WD)
N300 Double Cab
(2WD/4WD)
Metro 100cc Metro Plus Phoenix 125 Apache RTR 150
Scooty Pep+ Scooty Streak
Apache RTR 180
Scooty Zest Wego Jupiter XL Super
Heavy Duty
King GS King FLD King FB King MAX
CARS VANS SUVs CABS MINI TRUCKS
TRUCKS BUSSES MOTOR CYCLES
THREE WHEELERS
AGRICULTURAL
DEFENCE AND
SPECIAL
UML
DIMO
SMOT
ASHO
COLO
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strength in value chain
UML 7 13DIMO 10 32SMOT 3 4ASHO 17 10COLO 1 1AUTO 2 1
Source: Annual Reports, Company web sites Source: Annual Reports, LOSEC estimates
Graph 19: Revenue composition of lubricant and tyre products Table 03: UML's lubricants market share has improved
Sales qty (KL) Mkt share Sales qty (KL) Mkt share
Valvoline 1,077 1.98% 785 1.46%(UML)MAK 2,241 4.13% 1,760 3.28%(UML)Motul 46 0.08% 46 0.09%(AUTO)
26,753 49.30% 28,241 52.58%
Servo 6,833 12.59% 6,738 12.55%(IOC)
Source: Annual Reports, LOSEC estimates Source: Lubricant market report by PUC, Sri Lanka
8 | LOLC Securities Limited 9 | LOLC Securities Limited
Graph 18: After sales services to contribute 15-20% of
topline
Workshops
/Service
centers
Branches/S
howrooms
Dealers/Distributors/
customer contact
points/display points
Counter
>200025
2014
Caltex/
Chevron
UML has been able to consistently maintain a strong after sales service for their customers through its widely
distributed branch, showroom and dealer network which enables UML a wider reach to its existing and potential
customers. With its aggressive investment approach in upgrading and expanding workshops and showrooms, UML's
customer reach appears widely spread than most of its peers.
Spare parts & after sales services being the second highest contributor to the total revenue while retaining 10% CAGR
over last 7 years, we expect this segment to generate revenue with 15% YoY growth due to expected increase in sales
volumes along with capacity improvement of branches and workshops. We believe the investment in Rathmalana
property to set up a logistic hub and a large workshop will augur well with growing demand for after sales and spare
part services.
Being the one of few companies with a vehicle assembling licence, UML seems to have a significant strength in
assembling vehicles and marketing them through its efficient inbound and outbound dealership model. UML's fully
owned subsidiary Unimo Enterprises (UEL) is now well equipped with expertise, agreements of new principals in
place and enhanced operational capacity in order to assemble vehicles at double the capacity in coming years. Thus
we believe, UML can launch several assembled 'passenger vehicle products' in FY16 with the aim of having a fine
balance between import and assembly of different classes of vehicles in future years. We estimate these assembled
ones to capture a reasonable sales volume in next 3 years due to the attractive pricing compared with the imported
ones along with the efficient marketing and distribution model inherited with UML.
With the objective of leveraging on the customer value proposition, UML has been operating in lubricant (Valvoline
and MAK) and tyre (Yokohama) businesses while making a fair contribution to the Group's topline. UML has been the
only company amongst sector peers (excluding Autodrome) which offers lubricant products to customers and has
been able to capture a fair degree of market share.
125--
Wide customer reach to drive the business
Table 02: Better operational capability over peers
Diversification to
lubricant oil and tyre
businesses
Vehicle assembling
licence and close ties with
Chinese manufactures
will provide UML a
competitive edge
Vehicle assembling, a catalyst of changing the industry
2013Product
Relatively large number
of workshops, branches
and dealers
-
Related diversification to strengthen the value chain
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
- 2,000 4,000 6,000 8,000
10,000 12,000 14,000 16,000 18,000 20,000 22,000
2009 2010 2011 2012 2013 2014 2015 2016(E)
2017(F)
2018(F)
Spare parts, repairs and services Ttl. rev excl. spare parts, repairs and services% contribution to ttl.rev YoY growth
LKR Mn
0%
5%
10%
0
100
200
300
400
500
600
700
2009 2010 2011 2012 2013 2014 2015 2016(E)
2017(F)
2018(F)
Lubricants and car care products Tyres% contribution of lubricant to ttl. rev % contribution of tyre to ttl.rev
LKR Mn
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Strong balance sheet to provide convenient funding options
Graph 20: Increase in cash position and low gearing of UML Graph 21: UML could leverage on low gearing
Source: Annual reports, Bloomberg Source: Annual reports, Bloomberg
Graph 22: UML has a strong cash position and asset base over peers
Source: Annual Reports, LOSEC estimates
Source: Annual reports, Bloomberg
Graph 23: Higher dividend payout than peers Graph 24: Above the average dividend yeild
Source: Lubricant market report by PUC, Sri Lanka Source: Bloomberg Source: Bloomberg
9 | LOLC Securities Limited 10 | LOLC Securities Limited
Strong dividend pay-outs strengthening investor confidence
UML has managed to consistently maintain a dividend payout above 25%, recording it above the peers in the last 4
years. UML has produced a steadily raising dividend payout along with strong dividend yield exceeding 6.5%
indicating stability and financial strength of the business. Company's div. yield is currently at a premium to the sector
div. yield of 3.28% and we estimate that the company would have an even better div. yield in coming years to create
value to its investors. Thus we estimate UML's dividend payout ratio to remain minimum at 40% while div. yield to
reach over 8% by FY18.
UML pays fat dividends to
investors
Near zero gearing and
strong cash position to
allow for investments
UML has been able to generate strong free cash flow balances and gearing has continued to be at near zero level
which will open up further avenues for raising debt to venture into new projects. Its cash balance (combined with
cash in hand and short-term investments) over last few years is well above most of the peers, while reaching
approximately LKR 1.36 billion by the end of June 2015. Thus UML has appeared to be a self-financed business during
previous years in relation to its local peers.
0%
1%
2%
3%
4%
5%
6%
7%
8%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
18,000
20,000
2010 2011 2012 2013 2014 2015 2016E 2017F 2018F
Total equity Cash and cash equivalents
Total assets(LSH) Gearing (RHS)
LKR Mn
-
5,000
10,000
15,000
20,000
0
200
400
600
800
1,000
1,200
1,400
1,600
UML DIMO ASHO COLO SMOT AUTO
Cash and cash equivalents Total assets
LKR Mn LKR Mn
0%
7%
0%1%
0% 0%0%
19%
0% 0% 0% 0%0%
13%
0%
2%
6%
0%
0%
5%
10%
15%
20%
UML DIMO ASHO COLO SMOT AUTO
2013 2014 2015
0%5%
10%15%20%25%30%35%40%45%50%55%60%65%
2010 2011 2012 2013 2014 2015
UML DIMO COLO ASHO
SMOT AUTO
0%
2%
4%
6%
8%
10%
12%
0
1
2
3
4
5
6
7
8
9
2010 2011 2012 2013 2014 2015
Dividend per share Dividend yield
LKR
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Flexible on changes in macro economic variables
Source: Annual reports, Bloomberg
Source: Bloomberg Source: Bloomberg
Source: Annual reports, Bloomberg
Graph 27: UML will benefit on declining lending rates
Source: Bloomberg
10 | LOLC Securities Limited 11 | LOLC Securities Limited
Steady decline in interest rates backed by policy interest rate cuts and significant liquidity in the money market has
enhanced the affordability of vehicles including UML products in recent years. Therefore if interest rates continue to
remain low, people will continue to have cheaper financial products such as vehicle leases, loans and hire purchases
while benefiting UML in coming years.
CBSL has also indicated on keeping the interest rates low despite of Rupee devaluation, however we presume that the
currency devaluation is likely to create an upward pressure on interest rates in the near future. Adding fuel to the
fire was CBSL's directive to commercial and licensed specialized banks to reduce Loan to Value (LTV) to 70% in order
to discourage vehicle purchases on leases and thereby controlling vehicle import volumes and thus curtailing BoP
deficit. The directive is likely to hit the motor sector growth prospects in the future and therefore we have followed a
modest approach in estimating sales volumes of economic passenger vehicles and commercial vehicles.
Depreciation of CNY and
MYR to offset Rupee
devaluation
Vehicle loans and leasing
to be cheaper under low
interest rates
UML to leverage on low interest rate environment
Confronting FOREX risk as experienced industry player
UML appears to be exposed to considerable forex risk since its product portfolio is mainly consisting of vehicles with
Japanese, Chinese and Malaysian origin. From latter part of 2014, LKR has depreciated over Yen and Dollars making
Japanese vehicles relatively expensive than before. Specially with CBSL allowing Rupee to be freely floated since early
September 2015, Rupee saw a significant value depreciation against USD which will essentially lead prices of
imported vehicles and spare parts to go up in the near future. As a result, although UML is mostly likely to pass this
additional cost to the customers to maintain its target margins, company will find difficult to achieve anticipated sales
volume due to lowering demand on increased vehicle prices.
However, Chinese currency devaluation in August in this year along with depreciation of Malaysian Ringgit will make
vehicle and spare part imports from these countries relatively cheaper than before. But UML continues to remain
unhedged against currency fluctuations creating considerable risk despite diverse portfolio.
Graph 25: LKR depreciating against USD and JPY making
imports expensive
Graph 26: Yuan and Ringgit depreciating against USD
making Chinese and Malaysian imports cheaper
Imported vehicle prices
to rise up with rupee
devaluation, impacting
UML earnings
4
5
6
7
8
9
10
11
12
13
14
15
16
1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013 7/1/2013 1/1/2014 7/1/2014 1/1/2015 7/1/2015
%
12M T-Bill rate Weekly AWPLR
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
122
124
126
128
130
132
134
136
138
140
1/1
/20
14
2/1
/20
14
3/1
/20
14
4/1
/20
14
5/1
/20
14
6/1
/20
14
7/1
/20
14
8/1
/20
14
9/1
/20
14
10
/1/2
01
4
11
/1/2
01
4
12
/1/2
01
4
1/1
/20
15
2/1
/20
15
3/1
/20
15
4/1
/20
15
5/1
/20
15
6/1
/20
15
7/1
/20
15
8/1
/20
15
9/1
/20
15
USD-LKR JPY-LKR
LKR LKR
2.502.702.903.103.303.503.703.904.104.304.50
6.00
6.05
6.10
6.15
6.20
6.25
6.30
6.35
6.40
6.45
USD-CNY USD-MYR
CNY MYR
AWPLR declines and stabilizing at 6-7%
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Table 04: Valuation Sensitivity Matrix
13% 14% 15% 16% 17%1% 158.20 144.40 130.80 122.60 113.802% 167.70 152.10 136.90 127.90 118.203% 179.10 161.20 144.00 133.90 123.204% 193.00 172.20 152.40 141.00 129.005% 210.50 185.50 162.40 149.30 135.80
Source:CSE, Bloomberg, LOSEC estimates
Table 05: Peer Comparison
Name PE (x) PBV (X) ROE %
United Motors Lanka Plc (Sri Lanka) 70 6.94 0.92 4.09 14.91Diesel & Motor Engineering (Sri Lanka) 44 7.82 0.67 2.90 9.26Colonial Motors Plc (Sri Lanka) 13 6.70 0.48 4.96 7.50Sathosa Motors Plc (Sri Lanka) 13 6.29 1.40 2.34 24.73Lanka Ashok Leyland Plc (Sri Lanka) 38 16.28 1.97 2.68 12.82Sunfonda Group Holdings Ltd (China) 197 6.51 0.79 2.48 13.22Berjaya Auto Bhd (Malaysia) 494 10.19 4.59 5.09 51.96Baoxin Auto Group Ltd (China) 1089 12.30 1.28 1.52 10.89
Source:CSE, Bloomberg, LOSEC Research
11 | LOLC Securities Limited 12| LOLC Securities Limited
Valuation
We have used the Free Cash Flow to Equity (FCFE) model in deriving the valuation for UML. Accordingly we estimate
total valuation for the company at LKR 14.52 billion. We assume a cost of equity of 15% which is 7% premium to 3
year Sri Lanka Govt Treasury Bond Yield. A risk premium of 7% has been taken considering the equity market risk in
CSE as well as sector volatilities. We have taken a mid-term growth (3-6 years) of 5% considering the expected GDP
growth of the country and a free cash flow terminal growth (>6 years) of 3%. Accordingly, we value the share at LKR
144 which is a 47% discount to the current price of the share. At the current share price, UML is trading at forward
PE of 6.95X and a forward PBV of 0.95X.
Sensitivity of valuation for Terminal Growth and Cost of Equity is indicated below and sensitivity of key assumptions
are evaluated separately in proceeding section.
Cost of EquityShare price in LKR
Ter
min
al
Gro
wth
Rat
e
Market Cap (USD Mn) Dividend
Yield %
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Summarized Sensitivity of Assumptions
Graph 28: GDP growth sensitivity: High Graph 29: Currency sensitivity: Medium
Source:LOSEC Research Source:LOSEC Research
Graph 30: Tax rate: Medium Graph 31: Interest rate sensitivity: Medium
Source:LOSEC Research Source:LOSEC Research
Source:CSE, Bloomberg, LOSEC Research
12| LOLC Securities Limited 13 | LOLC Securities Limited
Earnings Risk Comment
UML’s valuation is dependent on the overall economic growth of the country and resulted increase in demand for
motor vehicles. Thus any broader economic slowdown leading to decline in GDP growth and GDP per capita income,
interest rate rises and rupee depreciation will dampen the expected value of UML.
Our investment case is evolved around the presumption of fast economic growth of the Island nation and resultant
increased consumption. But change of economic outlook to a stagnant environment can lead to people opt for basic
transportation rather than owning personal vehicles. Furthermore, change in lifestyles such as improved public
transport facilities can curtail demand for new vehicle imports.
In the short term, motor sector is highly sensitive to frequent vehicle import duty changes. Govt takes import duty as
an instrument to control the vehicle imports and thereby controlling the impact on the balance of payment. However,
we believe that UML is now well experienced and shaped in tackling these cyclical import duty changes and we
believe that the company is equipped and capable of rapidly introducing suitable vehicles which can exploit price
benefits emerging from continuous structural changes of import duties.
UML is heavily dependent on Mitsubishi brand due to its reputation in the local market while Mitsubishi vehicles and
spare parts account nearly 70% of UML's topline. Mitsubishi corporation is in existence in the global automotive
industry over a century and has built up its fame as a quality, reliable and affordable vehicle manufacturer. Therefore
in a scenario where the Mitsubishi Corporation to face a crisis or a significant reputational damage to the brand in the
global context, UML earnings could be affected substantially. However with the present global footprint of Mitsubishi,
we will not foresee such incident to occur in the short to medium term.
138
139
140
141
142
143
144
145
146
147
148
-1% 0% 1%Interest rate forecast
LKR
2%
-2%
138
139
140
141
142
143
144
145
146
147
148
-1% 0 1%Change of tax rate forecast
LKR
2%
-2%
100
105
110
115
120
125
130
135
140
145
150
155
160
-1% 0 1%Change of GDP growth forecast
LKR
-8%
8%
138
139
140
141
142
143
144
145
146
147
-1% 0 1%USD:LKR forecast
LKR
1.5%
-1.5%
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Appendices
Table 06: Return comparison
3 months -2.69 0.85 -2.10 2.916 months 8.67 2.38 -1.91 11.08YTD -5.60 -2.99 -6.43 10.031 year -3.07 -2.92 -5.88 2.43
Source:CSE, Bloomberg
Graph 32: Share Price Movement
Source:CSE, Bloomberg
Graph 33: PE Chart Graph 34: PBV Chart
Source:CSE, Bloomberg Source:CSE, Bloomberg
Source:CSE, Bloomberg Source:CSE, Bloomberg
Source:CSE, Bloomberg Source:CSE, Bloomberg
13 | LOLC Securities Limited 14 | LOLC Securities Limited
S&P SL 20
IndexDIMO
Graph 35: Price per Sales Graph 36: Dividend Yield
Graph 37: CSE PE Chart Graph 38: CSE PBV Chart
ASI Index% UML
50
70
90
110
130
-
1,000,000
2,000,000
3,000,000
4,000,000
5,000,000
6,000,000
Rs
Vo
lum
e
Volume Price
SMAVG (50) SMAVG (100)Highest Price at 01.24.2011: LKR 128.005Year Lowest Price as at 07.11.2012: LKR 43.40
0.0025.0050.0075.00
100.00
9/10/12 3/10/13 9/10/13 3/10/14 9/10/14 3/10/15 9/10/15
RSI (14)
0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15
PE ratio Highest Average Lowest
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
09/11/12 03/11/13 09/11/13 03/11/14 09/11/14 03/11/15 09/11/15
PBV ratio Highest Average Lowest
0.00
0.20
0.40
0.60
0.80
1.00
1.20
10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15
Price to Sales ratio Highest Average Lowest
8.00
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
10/01/12 04/01/13 10/01/13 04/01/14 10/01/14 04/01/15
ASI PE ratio Highest Average Lowest
1.00
1.20
1.40
1.60
1.80
2.00
10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15
ASI PBV ratio Highest Average Lowest
0
2
4
6
8
10
12
14
16
10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15
UML dividend yield Highest Average Lowest
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Table 07: Financial Summary ForecastFigures in LKR Mn (31st March) FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F)Income StatementRevenue 17,777 11,041 10,538 14,835 17,950 19,958
Cost of Revenue -13,513 -7,639 -7,811 -10,829 -12,924 -13,971
Gross Profit 4,264 3,402 2,727 4,005 5,026 5,987
Operating Expenses -1,653 -1,504 -1,568 -2,249 -2,685 -2,966
Operating Income 2,698 1,930 1,251 1,821 2,407 3,087
Share of profit of equity accounted invt 0 20 63 79 74 70
Pretax Income 2,713 2,174 1,626 2,086 2,701 3,450
Income Tax Expense -706 -567 -364 -467 -611 -786
Net Profit att. to shareholders 2,014 1,608 1,263 1,619 2,090 2,664
Balance Sheet Cash & Near Cash Items 1,349 911 1,619 1,996 2,334 3,213
Accounts & Notes Receivable 1,164 1,438 1,699 2,386 2,894 3,218
Inventories 2,621 3,324 3,934 4,438 5,311 5,741
Total Current Assets 5,143 5,685 7,281 8,849 10,568 12,201
Total Long-Term Assets 4,073 4,392 5,868 6,054 6,239 6,422
Total Assets 9,216 10,077 13,149 14,903 16,807 18,623
Accounts Payable 745 775 1,213 1,677 2,007 2,169
Other Short-Term Liabilities 952 1,030 1,319 1,619 1,919 2,219
Total Current Liabilities 1,696 1,806 2,532 3,296 3,926 4,389
Total Long-Term Liabilities 149 174 181 199 219 241
Total Liabilities 1,845 1,980 2,714 3,496 4,145 4,630
Share Capital 336 336 336 336 336 336
Retained Earnings & Other Equity 7,034 7,761 10,099 11,071 12,325 13,657
Total Equity 7,371 8,097 10,436 11,407 12,661 13,993
Total Liabilities & Equity 9,216 10,077 13,149 14,903 16,807 18,623
Cash Flow Statement Net Income 2,013 1,608 1,262 1,619 2,090 2,664
Depreciation & Amortization 93 134 138 139 141 143
Changes in Non-Cash Capital 1,248 -923 -428 -726 -1,052 -591
Cash From Operations 3,025 527 596 1,032 1,179 2,215
Capital Expenditures -226 -873 0 -200 -200 -200
Increase in Investments -734 -492 -935 -187 -205 -226
Cash From Investing Activities -911 -1,041 -287 -466 -480 -496
Dividends Paid -605 -874 -605 -648 -836 -1,332
Change in Long Term Borrowings -617 213 351 0 0 0
Cash from Financing Activities -1,223 -662 -255 -330 -516 -1,010
Net Changes in Cash 892 -1,176 55 237 183 709
Source:CSE, Bloomberg, LOSEC Research
14 | LOLC Securities Limited 15 | LOLC Securities Limited
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Table 08: Forecast Ratios FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F)
Profitability Ratios
GP Margin (%) 24% 31% 26% 27% 28% 30%
NP Margin (%) 11% 15% 12% 11% 12% 13%
ROE (%) 27% 20% 12% 14% 17% 19%
ROA (%) 22% 16% 10% 11% 12% 14%
Earnings per share (LKR) 19.95 15.93 12.51 16.05 20.72 26.40
Dividend per Share (LKR) 6.67 8.00 6.00 6.42 8.29 13.20
Credit Ratios
Total Debt/Equity Ratio (%) 8% 11% 12% 13% 14% 15%
Interest Coverage (X) 24.12 28.90 15.19 21.29 23.08 25.09
Total Assets/Equity (X) 1.25 1.24 1.26 1.31 1.33 1.33
Net Debt/EBIT (X) -0.29 0.36 0.80 0.58 0.49 0.25
Liquidity Ratios
Current Ratio (X) 3.03 3.15 2.88 2.68 2.69 2.78
Quick Ratio (X) 1.49 1.31 1.32 1.34 1.34 1.47
Asset Turnover Ratio (X) 1.93 1.10 0.80 1.00 1.07 1.07
Net Asset Value per share (LKR) 73.05 80.25 103.42 113.05 125.48 138.68
Growth Ratios
Revenue Growth YOY% -15% -38% -5% 41% 21% 11%
Earnings growth YOY% -12% -20% -21% 28% 29% 27%
Total Assets YOY% -12% 9% 30% 13% 13% 11%
Total Debt YOY% -67% 61% 34% 25% 20% 16%
Investment Ratios
PE Ratio (X) 3.21 5.15 7.04 8.97 6.95 5.45
Price to Book Value (X) 0.88 1.02 0.85 1.27 1.15 1.04
Dividend Yield (%) 10.42% 9.76% 6.81% 4.46% 5.76% 9.17%
Source:CSE, Bloomberg, LOSEC Research
Source:CSE, Bloomberg, LOSEC Research
15 | LOLC Securities Limited 16 | LOLC Securities Limited
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Source:CSE, Bloomberg, LOSEC Research
16 | LOLC Securities Limited 17 | LOLC Securities Limited
Joint Venture
TVS is a joint venture between UML and T.V Sundaram Iyengar & Sons Limited and TVS Motors of India. The company
is specialized in motor cycles, scooters, three wheelers and spare parts. TVS has built an extensive network of
distributors and dealers with 205 service points and 160 dealers for sales. TVS two wheeler portfolio includes cycles
with the engine capacity of 100/110/125/150/180 cc coupled with scooters and mopeds. TVS three wheeler
portfolio consists of locally modified three wheelers under the brand 'TVS King'. This is the first ever three wheeler
to be fitted with a 200 cc four stroke engine and it has been very well accepted in every part of the country for its
performance and fuel efficiency.
TVS Automotives Pvt. Ltd. is a fully owned subsidiary of TVS Lanka Pvt. Ltd. which markets automotive lubricants &
Tyres. It is the agents for Bharat Petroleum Lubricants in Sri Lanka and supplies automotive lubricants under the
brand of 'MAK Lubricants'.
Company
United Motors Lanka PLC (UML) is a licenced vehicle importer and distributor in Sri Lanka. It is the sole agent for
Mitsubishi vehicles in the country. Apart from its main business of importing and selling automobiles, UML is engaged
with vehicle repairing, spare part sales and after sale services, sale of car care and lubricant products and tyre sales.
The brands marketed by United Motors and its subsidiaries and associates include Mitsubishi passenger and Fuso
commercial vehicles from Japan, TVS two and three wheelers from India, Perodua compact cars from Malaysia, JMC
commercial vehicles, DFSK Mini trucks, Yokohama tyres from Japan, JK tyres and Mak lubricants from India and
Valvoline lubricants and Eagle One car care products from USA. The United Motors has 9 branches strategically
located across the island which offer sales of vehicles and genuine parts as well as workshop services. The UML group
has over 2,000 dealers island-wide for the distribution of tyres, lubricants, two wheelers and three wheelers, with
representation in both urban and rural areas.
Unimo Enterprises imports and distributes Perodua cars, Morris Garages (MG cars), JMC cabs, DFSK vans, Yokohama
tyres and assembly of DFSK vans. The company’s branch network is strategically located in Anuradapura, Kandy,
Kurunegala, Matara, Nugegoda, Nuwara Eliya, Ratnapura, Kelaniya and Jaffna while its Yokohama tyre operation
distributes its range of products through thirty key dealers located around the island.
Orient Motor Company imports and retails small commercial vehicles under the brand DFSK 'Unimo Lokka'. This
Chinese truck has been specifically designed for the Sri Lankan terrain and is supported by higher road bearing
capacity and more sophisticated features than rivals. Since the introduction of this truck in 2011, 4000 units have
been sold while capturing 10% market share.
Unimo Enterprises Ltd.
Orient Motor Company Ltd.
TVS Lanka Pvt. Ltd.
TVS Automotives Pvt. Ltd
Group Structure
Subsidiaries
United Motors Lanka PLC(UML)
Unimo Enterprises Ltd(100%)
Orient Motor Company Ltd (100%)
UML Property Developments Ltd (100%)
TVS Lanka Pvt. Ltd(50%)
TVS Automotives Pvt. Ltd (100%)
Initiation Coverage: United Motors Lanka PLC | 01 October 15
UML Shareholding Distribution (as at 30. 06.2015)
Shareholder % Stake
Mr. M.A. Yaseen 61.20%Ms. R.R Yaseen 10.67%Mrs. S,M. Chrysostom 6.88%Mitsubishi Motor Corporation 4.89%Mr. C. Yatawara 1.22%Mr. H.A Van Starrex 0.68%Capital Development & Invetsment Company PLC 0.60%Bank of Ceylon 0.34%Mr. A.M Weerasinghe 0.30%Deutsche Bank AG Singapore branch 0.25%Mr. S.D. Yaseen 0.24%Eagle Growth Fund 0.22%Mrs. S.T. Xavier 0.20%Hatton National Bank (Trading portfolio) 0.19%Waldock Mackenzie Ltd/Hi-Line Trading (pvt) Ltd. 0.16%Mr. J.A Yaseen 0.15%Mr. P. Rathnayake 0.15%Mrs. J.D De Silva Sugathapala 0.15%Ms. R. Suhayd 0.15%Mercantile Investment and Finance PLC 0.15%Others 11.33%Total
Source: Annual Report FY14/15 Source: Annual Report FY14/15
Source: Annual Report FY14/15
17 | LOLC Securities Limited 18 | LOLC Securities Limited
301,880
Although a single party exists with a controlling stake of 70%, we believe that the Board has the flexibility to drive the
company’s strategy to optimize the stakeholder expectations including minority shareholders mainly due to its sound
corporate governance structure along with unambiguous business operating model. The management is also of the
view that major shareholders’ influence on company management is at a very minimum level where all the strategic
business decisions are made by qualified and experienced business professionals. Given its good corporate
governance and sound performance, UML has been recognized amongst the top 100 of the most respected entities in
Sri Lanka, which will essentially help to improve investor confidence on the company.
Corporate governance structure
No. of shares
151,000 150,000
100,900,626 11,427,419
Apart from 'CEO', 'Finance Director' and 'Director-after sales services' along with 'one non-independent director', the
Board of UML is consisting of 5 Non-Executive Independent Directors. There is also a representative from Mitsubishi
Motor Corporation, Japan in the Board as a non-executive independent director which leads UML’s Board to make
decisions under the close scrutiny of a reputed multinational corporate. Upon analyzing UML’s historical financial
information, it is evident that related party transactions have been recorded relatively in less numbers and disclosed
in a transparent and explicit manner.
1,231,800 690,353 604,209 351,182
201,085 187,643 165,354 156,177 156,000 151,433
Graph 40: Shareholder structure 2 (as at 31.03.2015)
Graph 41: Composition of EDs and NEDs
Graph 39: Shareholder structure 1 (as at 31.03.2015)
61,750,266 10,767,210
6,945,471 4,937,142
256,527 243,300 225,175
33%
56%
11%Exe. directors
Non exe. independent directors
Non exe. non independentdirectors
Resident48%Non-Resident
52% Individuals77%
Institutional23%
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Key Management (Source: Company Annual Report 2014/15)
Sunil G. Wijesinghe / Chairman - Non Executive Director (Independent)
Chanaka Yatawara / Group Chief Executive Officer - Executive Director
Aashiq Lafir / Executive Director (Finance)
Ramesh Yaseen / Executive Director (After Sales Services)
Ananda Atukorala / Non Executive Director (Independent)Source: Annual Report FY14/15
Masafumi Sadawa / Non Executive Director (Independent)
Source: Annual Report FY14/15
18 | LOLC Securities Limited 19 | LOLC Securities Limited
Ananda Atukorala serves as an Independent Non-Executive Director of Orient Finance PLC, Bartleet Finance PLC, UB
Finance Ltd., Pragnya Tech Parks Lanka (Pvt) Ltd., Arni Holdings and Investments (Pvt) Ltd., Unawatuna Boutique
Resort (Pvt) Ltd., Unimo Enterprises Ltd., TVS Lanka (Pvt) Ltd. and Credence Genomics Private Ltd.
Masafumi Sawada is the General Manager of Asia & ASEAN A Department, Mitsubishi Motors Corporation, Japan
Sunil Wijesinha is the Chairman of Watawala Plantations PLC, Unimo Enterprises Ltd., Orient Motor Company Ltd.,
UML Property Developments Ltd. and TVS Automotives (Pvt) Ltd. Mr. Wijesinha is also a Director of BizEx Consulting
(Pvt) Ltd., Siyapatha Finance PLC, National Institute of Business Management and TVS Lanka (Pvt) Ltd. He was the
former Chairman of NDB Bank PLC, Merchant Credit Ltd and Employees’ Trust Fund Board. He was the former
President of Japan Sri Lanka Technical and Cultural Association (JASTECA), Immediate Past Chairman of Employers’
Federation of Ceylon and immediate past President of the National Chamber of Commerce of Sri Lanka. He is a Fellow
of Chartered Institute of Management Accountants (UK).
The company was founded in 1945 as a Private Liability Company. In 1972, it was vested with the government and
carried out operations as the Government Owned Business Undertaking of United Motors. In 1985, the Company
entered into a distributor agreement with Mitsubishi Motors Corporation, Japan and has since then been the sole
distributor for brand new Mitsubishi vehicles in Sri Lanka. In 1989 the Company was selected as the first
Government venture for ‘Peoplisation’ with the intention of broadening its ownership amongst the public. In May
1989, the Company was renamed as United Motors Lanka Limited and incorporated as a Public Limited Liability
Company with an authorized share capital of Rs.100,000,000.
In 1994, the company incorporated of a subsidiary - UML Property Development Ltd.. By 2002, Unimo Enterprise Ltd.
was acquired by UML and during 2003, 50% interest in TVS Lanka (pvt.) Ltd. was acquired. During 2007, the
Company was reregistered under the new Companies Act No. 07 of 2007 as United Motors Lanka PLC. In December
2010, the company increased the number of shares by way of a share split on the basis of two new ordinary shares
for every existing issued ordinary share.
Mr. Chanaka Yatawara is a Director of Unimo Enterprises Ltd., Orient Motor Company Ltd., UML Property
Developments Ltd., TVS Lanka (Pvt) Ltd. and TVS Automotives (Pvt) Ltd. He holds a degree in Business
Administration - Economic from the Lewis & Clark College, Oregon, USA.
Lafir has over 25 years of senior management experience in diverse business activities. He is also a Director of Skills
International (Pvt) Ltd. He is a Fellow of the Chartered Institute of Management Accountants (CIMA-UK) and an
Associate Member of the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). He also holds a Masters
Degree in Business Administration from the Post Graduate Institute of Management of the University of Sri
Jayawardenapura
Ramesh Yaseen is a Director of Unimo Enterprises Limited. He was a former Director of Readywear Industries
Limited.
History
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Motor Sector in Sri Lanka
United Motors 106 10,695 1262.33 84.34 11.0 7.7 7.5 1.3 6.81DIMO 690 6,125 596.08 1046.50 9.3 4.6 7.7 0.7 3.17C M Holdings 137 2,025 283.99 250.18 7.5 5.8 7.4 0.5 4.80Ashok Layland 1,450 5,250 331.70 758.11 12.8 7.4 15.8 1.9 3.08Sathosa Motors 300 1,810 261.33 214.46 24.7 12.4 6.3 1.4 -Autodrome 850 1,020 38.27 824.22 4.8 4.2 21.9 1.0 0.8
Source: Bloomberg
Indicator Value
PER 8.36PBV 1.18Dividend Yield 3.28%
Source: LOSEC estimates Source: Bloomberg
19 | LOLC Securities Limited 20 | LOLC Securities Limited
Motor sector in Sri Lanka consists of 6 listed companies (UML, DIMO, ASHO, COLO, SMOT, AUTO)and unlisted
companies such as Toyota Lanka, Associated Motorways Pvt. Ltd, Stanford Motors, Ishara Traders, Indra Traders, etc.
In addition to that there are various institutional and individual vehicle importers who import and sell brand new and
used vehicles originated from different countries, mainly from Japan, India, South Korea, Europe and China. Although
primary business in this sector being the importation and distribution of motor vehicles, most of these companies
have also been engaging with industry related other businesses including repairs and after sale services, spare-part
sales, lubricant and car care products, tyre importing/manufacturing and vehicle assembling. The sector currently
demonstrates a growing tendency towards assembling vehicles within the country in order to cater to local vehicle
demand.
PER PBV Dividend
Yield %
Y/E Net
Profit(LKRMn)
NAV(LKR per
Share)
ROE%
*Company overview, Group structure, UML shareholding distribution, Composition of Eds and NEDs, Key management, History, SWOT analysis,Industry analysis are taken from the extracts of websites, Annual reports,
Bloomberg and LOSEC research materials.
ROA%
Progression made in the road infrastructure development through improved accessibility and connectivity has shown
a positive contribution to the motor sector. Road development was lackluster in last few decades due to the war has
been given prominence by the governments which were in power time to time. However with the closure of these
ethnic conflicts in 2009, transportation infrastructure achieved a remarkable growth during last couple of years. Poor
public transportation system in Sri Lanka also plays considerable role in uplifting demand for private motor vehicles.
Although public passenger transportation showed some progress in recent times, it is not sufficient to attract
commuters who use private modes of transportation at a significantly higher cost. According to the Urban Transport
Master Plan developed by Japan International Corporation (JICA), demand for private motor vehicles are expected to
grow while share of public transportation is expected to decrease from 58% in 2013 to 41% in 2035.
Counter
Table 09: Financial performance comparison of peers
Table 10: Selected motor sector indicators Graph 42: Earnings comparison of peers
Total vehicle population of the country accounts for approximately 5.6 million vehicles while 314,155 new vehicles
have been registered for the first half of 2015. Amongst listed companies in the sector, UML accounts for the highest
market cap which is LKR 10,695 million while the market cap of the sector reaches to be LKR 27.2 billion. These listed
players have grown rapidly in last few years with the increased demand for vehicles and other related products/
services. However, the listed companies encounter a severe competition from non-listed vehicle importers since the
demand for used vehicles over brand new ones due to unbalanced pricing and substantial brand preference for
'Toyota'.
In recent times, Sri Lankan motor sector has become highly sensitive to frequent import duty changes and fuel price
fluctuations. However, despite these uncertainties, the sector has been growing at a rapid phase in the last decade
mainly due to increasing the disposal income of general public and prices of vehicles specially motor cycles, three
wheelers and passenger cars becoming relatively cheaper and affordable for low and middle income people.
A summarized snapshot of the performance and investor ratios of six listed companies in the motor sector is as
follows:
Price(LKR
per Share)
Market Cap
(LKR Mn)
0
500
1000
1500
2000
2500
2013 2014 2015
UML DIMO COLO ASHO SMOT AUTO
LKR Mn
Initiation Coverage: United Motors Lanka PLC | 01 October 15
SWOT Analysis
Strengths
- Strong brand name of United Motors with 70 years in business- Sole agent for Mitsubishi motor vehicles along with strong brand image of Mitsubishi in the globe- Experienced and qualified Board of Directors- Diverse product portfolio with wider brand spread- Island wide branch and dealer network to deliver the products- Strong balance sheet, sound cash base and near zero debt position enabling convenient access for funding- Gvt. approval to assemble vehicles locally
- Increasing per capita income along with the consumption growth will create a demand for UML's products- Prevailing low interest rate environment will make vehicle leasing products cheaper
- Growing demand for fuel efficient vehicles (ex:electric, hybrid, plug-in-hybrid electric)
- Frequent changes of import duties, exchange rates and interest rates- Oil price fluctuations- Heavy competition stemming from other global brands (ex:Toyota, Honda)
- Frequent changes in technology- Reduction and implementing a cap of Loan to Value (LTV) ratio by CBSL
Bargaining power of customers
Threat of substitutes
Threat of new entrants
Existing Rivalry
20 | LOLC Securities Limited 21 | LOLC Securities Limited
Weaknesses
Threat of new entrants is low due to high capital requirements to enter to the industry. Very few players including
UML are capable of setting up island-wide showrooms, distribution net work and assembly facilities through
significant capital infusion.
Public transportation can be considered as the main substitute for motor vehicle industry. Since Sri Lanka does not
have strong public transportation system, demand for private motor vehicles are considered to be high. Thus threat of
substitute towards the industry is relatively low.
UML customers will be the general public, private corporates and state enterprises. Since the industry is concentrated
with many institutional players and individual importers, customers have relatively high bargaining power in
choosing vehicles from various models. However, if the customer is selective for a particular brand like Mitsubishi
then their power on bargaining could be relatively less (medium), as they have to rely on UML.
UML has a high reliance on Mitsubishi Motor Corporation as its main products are Mitsubishi vehicles. Thus
Mitsubishi retains a high bargaining power over UML in deciding prices and importing quantities.
Rivalry amongst existing listed and non listed companies in this sector is high, because customers have wider
product/brand base for their selection.
- Heavy dependent on principles' production volumes and allocations (ex. Production halt of Perodua Elite by the
manufacturer and delaying to introduce a replacement to the market leading UML to miss the opportunity of import
duty reductions on small vehicles)
- Significant demand for used vehicles over brand new vehicles and many institutional and individual players dealing
with used vehicles imports
Threats
Bargaining power of suppliers
Industry Analysis
- Poor public transportation and low vehicle penetration compared with other countries in the region will create
demand for private motor vehicles
Opportunities
Initiation Coverage: United Motors Lanka PLC | 01 October 15
Recommendation Guidance
BUY – expected return > 10% in excess of benchmark return
SELL – expected return less than benchmark return
HOLD – expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years
Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.
Risk Level Evaluation
High: Maximum price volatility to be up or down more than 50% monthly
Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.
Financial Glossary
EPS = Earnings per Share
ROA = Return on Assets (adjusted net profit/average total assets)
ROE = Return on Equity (adjusted net profit/average total equity)
CAGR = Compound Annual Growth Rate ((End Value/Start Value) ̂(1/number of years) -1)
GP= Gross Profit
EBITDA= Earnings before interest, tax, depreciation and amortization
PBT= Profit before tax
PAT= Profit after tax
NP= Net Profit
PBV= Price to book value ratio
PE= Price to earnings ratio
21 | LOLC Securities Limited 22 | LOLC Securities Limited
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Initiation Coverage: United Motors Lanka PLC | 01 October 15
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