Thursday, October 4, 2012

Indonesia Multifinance Companies Brace for a bumpy ride


By Lim Sue Lin            

Indonesia Research Team

· 2W sales to decline after implementation of minimum down payment (DP); prospects for 4W remain robust

· Alternative growth via syariah lending may be short-lived until regulators plug the loophole

· For exposure, pick BFIN and CFIN, avoid 2W multi finance companies (MFC)

Minimum DP regulation has a larger impact to 2W MFCs. 2W sales have been on a downtrend this year, more so after the implementation of minimum DP effective 15 June. We expect 2012 2W sales to contract by 18% while AISI expects at least 20% contraction. We may only see the full impact in September or 4Q12 because of seasonal factors in 3Q12, i.e. fewer working days in August due to festivities. That said, the impact is expected to be more severe on 2W than 4W due to waker purchasing power of 2W borrowers.

Revved up 2W lending via syariah arm, but that may be short-lived.  Our checks with the MFCs indicate that 1 in 3 bookings for 2W were made through an MFC’s syariah financing arm, which is currently exempted from the minimum DP regulation. However, this may be short-lived as BI and MoF have indicated that the rules may also apply to syariah financing soon. Although punitive, these regulations are aimed to manage asset quality after rapid growth over the past few years.

Long-term prospects for 4W remain robust.  Jul-12 4W sales grew 15% y-o-y to reach a monthly high of 103k units, thanks to resilient consumption arising from a rapidly growing middle class population, low interest rates and strong seasonal trends leading up to Hari Raya Lebaran in mid-August. But August sales are expected to be weak due to fewer working days. Nevertheless, we expect 4W sales to pick up in September to meet our 20% growth forecast for 2012. Gaikindo’s growth forecast is comparable to ours.

Positive on BFIN and CFIN; avoid 2W MFCs until impact higher DP stabilises; Buy BBCA for a 4W proxy play. There are near-term headwinds for MFCs that focus on 2W, but we would suggest taking positions in BFIN and CFIN as these companies are unlikely to be adversely affected by the DP regulation. However, we caution that these companies are tightly held by banks or foreign shareholders; hence, liquidity might be low. MFCs still trade at a discount to banks but the discount the justified with higher risks. A strong proxy play for 4W would be BCA Finance via BBCA (Buy, TP Rp9,100)

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