THANI : Ratchthani Leasing

One of the leading truck hire-purchase company in Thailand. Thani has been in the commercial truck hire-purchase market for almost 40 years. To operate hire-purchase services for financing new vehicles and used one, it is not only having the money to do the contract but it needs all of this key success factors

  • Funding: availability of source of fund and competitive cost of fund
  • Credit assessment: in order to control credit quality and maintain the acceptable risk of loan portfolio.
  • Collection ability: to ensure that the loan to lessee won’t be Non-performing liability (NPL) in the future.
  • Ability to acquire customer from the dealers.

Investment Thesis

  • New loan growth of truck segment both in New car and used car. The company target new loan growth at approximately 13% or 24bn in 2018 and the outstanding of hire-purchase portfolio will be 45 bn at the ending of 2018 but we see the management target seems too conservative. The growth of loan portfolio will come from
    • Government spending on infrastructure that leads to high demand of truck.
    • The expansion of boarder trade in the North east of Thailand. The growth in export of Thai products and recovery of main agricultural product price such as Jasmine rice, seasonal fruits, cassava and so on.
    • THANI expects to penetrate into fleet market (larger volume with low yield but low credit risk) such as the logistic companies in commerce and petrochemical segment
  • In order to offset with declining of yield when THANI focus on fleet segment, THANI will increase the portion of used truck portfolio that has 12% of effective interest rate yield vs. 7% of new car.
  • Declining of General reserve in 2018 due to THANI has fully prepared the provision for doubtful account to the first adoption of IFRS9 in 2019 which will boost the net profit after tax in the second half of 2018 and in the best case if the general reserve is redundant, it might be reversed.
  • Further Declining in Cost of fund and less impact to rising rate risk in short-term period since THANI received A- stable rating from TRIS in late 2016 that massively reduce credit spread of its debenture.

Business Overview

  • The company has operated business on hire-purchase vehicles. Thani has emphasized on car market segment especially in Commercial vehicles such as Truck, Trailer, pick-up, taxi and etc. and personal used-cars (supercar, luxury and big-bike)
  • THANI has 13 branches throughout the country
  • Loan portfolio breakdown: Truck (New and Used) 70%, Luxury car and super car 20%, Big Bike 5% and others
  • New cars account for 70% of total Hire-purchase portfolio and the rest is pre-owned vehicle.

loan portfolio and new loan

int. table New vs usedLoan portfolio: New and Used car portfolio

yield new vs used.JPG

  • As you could see on those figures, Loan portfolio has impressive growth for the last 5 years which new truck product is the major contribution and the effective interest rate of New vehicles was 6.5% in 4q17 that declined from 7.5% in 1q13 compares to 10% yield of pre-owned portfolio. Due to the sharp declining of New vehicle yield it shows how intense of the competition in the market relative to the pre-owned market that has lower price competition. Fee and other income are significantly intact.

seized asset

  • Duration of each contract is 4.25 years
  • In 2015, the pre-owned market has declining that led to used car price significantly dropped which forced THANI to make losses in selling of seized asset.

Financial Highlight

revenue structure

  • Total revenue is composed of Interest income (84%) and Fee and other income (16%) in 2017. There is some concern on regulatory risk of market conduct that issued in Feb 2018 and will be implemented in July 2018. The new regulation will be applied on individual hire purchase contract which has definition that the car must be the individual car or pick-up or truck that only use for the personal purpose and not using for any commercial purpose such as for rent or logistic business and so on. The main concern is debt collection process that must charge the lessee with proper and economical expenses but 70% of THANI loan portfolio is commercial truck and the major customer is SMEs and small companies and the fee revenue that relevant with the market conduct is approximately 12% of total revenue therefore, the real effect of this concern will be only 12% x 30% = 3.6%.

Effective Interest rate

yield

  • Effective interest rate has continuously dropped from 9.x% to 7.5x% in the latest quarter (1q18) due to 2 factors. The first factor is that we are now living in the low interest rate era that the Thai government bond 3yr yield declined from 3.05% in the beginning of 2012 to 1.58% in Feb 2018 and this led to the second factor that the market became more competitive especially in the new car hire-purchase services because the whole industry has windfall of lower cost of fund.
  • Net interest margin (NIM) has increased from 4.25% in 1q12 to 5.46% in 1q18 (latest quarter) mainly from the faster pace of declining in cost of fund than declining in yield and in the late of 2016, THANI received A- stable from TRIS rating (The rating agency in Thailand).

Funding

cost of fund

  • After receiving A- rating in 4q16, THANI reduced avg. cost of fund from 3.58% in 3q16 to 2.47% in 1q18.

IBD

LT-debenture.JPG

  • Current DE in 1q18 was 6.0 and the DE covenant of debenture is 10 times of equity but the management said they try to set internal threshold DE at 8.
  • There is a concern on whether the low cost of fund which contribute the improvement of NIM will be sustained since the Fed has intention to raise the rate in the near term and all the gurus expect the rate will be into the uptrend in the beginning of 2019. To genuinely speak, THANI or any other financial companies inevitably affected to the rising rate risk that will increase the cost of fund but it depends on how they manage the Interest-bearing debt composition and the combination of fixed rate and floating rate in their book.

Credit spread

  • As you can see on the left figure that even though the recent government bond yield has climbed up from 1.5xx% to 1.7xx% in May-2018 as same as in the early of 2017 but I don’t think the coupon rate of THANI debenture which will be issued in the future will go back to 2.8x-3% as in the past due to the improving of asset quality and the high demand from institutional buyer which push down credit spread from 1.xx% to approximately 0.6x-0.7x% in the first quarter of 2018.
  • I personally think that we still benefit of declining cost of fund in 2018 due to the latest issued debenture THANI got 2.3% which means there is only 71 bps of credit spread (2.3% – 1.59% (Thai Government bond 3yr yield) = 0.71%). The Investor relation said there is a huge demand on THANI’s debenture.

MLR.JPG

loan composition.JPG

  • We study the history of rising of interest rate period and it comes to the conclusion that the company may have less impact of rising interest rate as they experienced in 2010-2012 because at that period of time THANI has the combination of Interest-bearing debt portfolio that roughly 80% is Long-term loan (green area) with floating-rate condition (MLR) and the others were short-term loan and Overdraft account that means 80% of their liability is risking of higher cost when MLR went up. Therefore, cost of fund in that period rose from 4.64% to the peak nearly 6% in 4q11 compares to the present period that 100% of liability is fixed rate and almost 60% is Debenture (yellow area) and other 30% is OD/ST loan at this combination, I think THANI will have no effect of increasing in cost of fund for the previous issued. However, we will have to monitor the magnitude of higher in cost of fund of new debenture in the future.
  • The Asset-Liability management: THANI is now using 3-yr bond and Short-term loan (less than 1 year duration) to fund 4.x years of asset duration.

PPOP.JPG

Asset quality

NPL.JPG

provision

  • THANI reported latest (4q17) NPL (overdue more than 3 months) at 4.13% and the special mention loan (overdue less than 3 months) at 1.09% with the robust of coverage ratio at 111% which has been rising from 62% in 2014.
  • THANI has prepared the provision for IFRS 9 for almost 3 years. As you can see the increasing provision for doubtful account that on the red bar is additional reserved called “General Reserve” to cover expected loss in the future. On the other hand, Blue bar in Bad debt expense on quarter is the normal provision and write-off in each quarter we see that it’s reducing due to the better quality of account receivable. I expect that in the second half of 2018 where the company clearly concludes that whether the general reserve in their book is adequate or not? If it is enough, there will be no further of general reserve to be set and the lower of provision will boost net profit after that.

bad debt expense.JPG

Industry landscape

landscape.JPG

truck transfer.JPG

  • The main competitor that listed in SET is ASIA SERMKIJ LEASING (ASK) which have roughly 70% on the commercial car as well as THANI but my opinion is that ASK has less competitiveness than THANI due to high operating cost and the less aggressiveness and ASK will face a higher impact of IFRS9 than THANI due to the aggressive accounting standard and low asset quality such as NPL and SML in 2017 of ASK is 10.7% vs 5.21% THANI, Coverage ratio in 2017 of ASK was only 65% compares to 111% THANI and etc. This will lead to higher of provision in the future

Risk

  • Economic slowdown: Less boarder trading activity, worsen of export
  • Declining in Yield due to high competition in the market
  • Rising of the interest rate: Increasing in cost of fund
  • Regulatory risk

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