Auto, Short-Term Blip, But Long-Term Boom

We see a promising outlook for domestic vehicle sales in the long term, although there might be hiccups in the short-term due to the new higher downpayment policy. Although 4W vehicle sales growth is likely to soften in the second-half, our calculation shows that FY12 car sales might still be higher than that in FY11, thanks to strong sales growth in the first-half.

However, 2W vehicle sales are estimated to decline as motorcycle consumers are more affected by the higher downpayment ruling than 4W customers. Our top picks are Astra International (ASII), Indospring (INDS), and Gajah Tunggal (GJTL).

Promising long-term outlook
Indonesia’s domestic 4W vehicle sales outlook is promising, given the current low interest and inflation rates. In addition, Indonesia’s huge young population presents a large market potential. Notably, the country’s current population to car ratio is only 44 cars per 1,000 population, very low for a nation with GDP per capita of USD3,543 and modest public transportation facilities.

As comparison, in Thailand, where GDP per capita is USD5,117, there are 123 cars per 1,000 while in Malaysia, with GDP of USD8,423 per capita, it is 300 cars. The massive investments into auto production capacity indicate a promising Indonesian automotive sector outlook. It is reported that the country’s domestic production capacity is projected to increase by 75% to 1,360k units per annum (p.a.) over the next three years.

Short-term impact of new downpayment policy
We foresee some car and motorcycle buyers deferring their purchases as they may now need to save longer in order to afford a higher downpayment. However, despite the implementation of the new downpayment policy, we expect 4W vehicle sales growth to still be positive this year. Based on our calculation, FY12 domestic 4W vehicle sales are projected to reach 938k units (+5% y-o-y) in 2012. However, we anticipate a decline in 2W vehicle sales to 7.7m units (-4% y-o-y) this year.

Stiff competition
We expect competition in the domestic auto market to intensify, especially in the MPV segment, which accounts for around half of total car sales nationwide. Suzuki Motor launched its new MPV, Suzuki Ertiga, at end-April while in early June, Nissan Motor launched its MPV, Nissan Evalia, with which it is targeting to capture a 20%-25% share in the domestic MPV market. These MPVs will compete head-on with Toyota Avanza and Daihatsu Xenia.

Fuel subsidy removal the biggest threat
4W vehicles sales growth had always been positive, except in 2006 and 2009 when sales declined due to rising inflation and the impact of price increases in subsidized fuel and commodities, respectively. We see the threat of a price increase in subsidized fuel becoming remote as international oil prices are already trending down. Notably, international oil price had declined to USD83.8/bbl in mid-June, down 21% from USD106.2/bbl in early May 2012.

Promising long-term outlook

We foresee robust domestic 4W vehicle demand on the back of low interest and inflation rates. Moreover, the Indonesian population, with its large productive age (122m people) and large young age (89m people) represents a huge potential market. Notably, the current Indonesian population to car ratio of only 44 cars per 1,000 is very low for a nation with a GDP of USD3,543 per capita and modest public transportation facilities.

For comparison, the ratio of cars per 1,000 population in Thailand – with a GDP of USD5,117 per capita – is 123 cars, while that for Malaysia – with USD8,423 GDP per capita – is 300 cars. We expect Indonesia’s domestic car sales growth to accelerate when the country’s GDP reaches USD4,000-5,000 per capital.