SAWAD: Srisawad Corporation

The temporary mistakes leave the opportunity wide open?

  • The first mistake of SAWAD that plunged the stock price from around 60 baht/share to around 30 – 34 baht/share was the unknowingly surprise from spiking of NPL to 7.5% (exc. prior NPL from BFIT) in 1q18 from 3.9% in 4q17 and relative to normal historical level at 5%. The problematic NPL came from Small business customer which accounted for 700 mb this was totally unexpected from the market and at that time nobody knew that SAWAD had this kind of customer in portfolio that has very massive ticket size. The company claimed that the loan has collateral valued for 2,000 mb (LTV = 30%) and the customer has already paid the interest and principal within 2q18.
  • The Second was the prolonged restructuring with BFIT which drove the interest rate yield down from approximately 28% to the lowest point 20.6% in 1q18 and undeniably declined in NIM from 25% to 20% but for me it’s not only about internal restructuring but also the intense competition in the market as well. In addition, loan growth had been slowed from shifting contract of existing customer to BFIT by giving the incentive of lower the interest rate and subsidized VAT 7% for Hire-purchase contracts.
  • According to those mistakes led net profit growth (yoy) turned into negative since 4q17 to 2q18 down by -21%, -27.4% and -3.2%, respectively. The market participants never expect this company to pose negative earnings growth or even small growth like 10-15% p.a.
  • The sentiment and the quality of the company were downgrade at that time. Sending Trailing PE to around 13-15 times and Trailing PBV to 3-4 times.

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Investment Thesis

  • The valuation was cheap relative to its growth after all of this problematic issue were resolved which seeing it as temporary problems rather than permanent issues it will provide an opportunity (the restructuring won’t prolong forever and NPL as the management said it was manageable) and compared to its peers like MTC but it is unquestionable that MTC should have been traded at premium than SAWAD due to its growth prospects, great asset quality and well-managed but as an investor we should seek for the best return with justifiable risk/reward.
  • Available room for improvement
    • Interest rate yield and NIM; According to internal restructuring via transferring loan contracts from SAWAD to BFIT in order to avoid regulatory risk sent interest rate down due to the company had to give the incentive like lower interest rate and subsidize VAT. We expect the low-interest yield contracts will decline after the restructuring was done or it should run down within 18-24 months (avg. contract life). The increasing in yield will help better net profit growth in the future.
    • loan per branch of SAWAD is lower than MTC even though avg. ticket size per contract of SAWAD is higher than MTC. We think that SAWAD need to improve the efficiency and rapidly ramp up loan growth more to catch up MTC. This improvement will lead to higher profit growth from economies of scale benefit due to 75% of total cost was fixed.
    • The high NPL ratio of SAWAD compares to MTC and NTL (Ngern Tid Lor) might have to decrease due to the new regulatory which the total yield including late penalty fee will be capped at 28% this will encourage SAWAD to better manage asset quality and stricter with delinquent customers.
  • Growth prospect; The management targets loan growth in 2019 around 20-30% and 300 new branches. The company does believe that this market is so huge and total industry keeps growing even MTC who has highest market share said they will grow at 30-35% in 2019-2020. Once the Bank of Thailand (BOT) officially supervises asset-backed industry we will see the total number of outstanding loan in the system.

Business Overview

  • SAWAD provides financial products to low-income customer who lacks of ability to access conventional financing from commercial bank due to they don’t have salary slip because they are not white-collar worker, they don’t have bank account, they don’t have a great credit quality and so on but these customers have asset to be placed as collateral. SAWAD has
    • Auto-backed loan: Period 6-48 months, LTV 30-70% of appraisal price. Hire purchase contract requires actual transfer the ownership while loan contract only title book delivered without transferring the ownership.
    • House & Land backed loans: Period 12-24 months, LTV 30-50% of assessed value (Mortgage or sale with redemption right)
    • Personal loan and Nanofinance: Period 24-36 months, available credit line = 2.5 times of monthly income but not exceed than 50,000 baht/person.
  • Loan portfolio Breakdown in 2017

loan portfolio breakdown 2017.JPG

  • SAWAD has 2,740 branches in 3q18. In the internal restructuring period, the pace of opening new branch was slow and MTC as a competitor took advantage to aggressively expand its network in that period which now outpaced SAWAD.

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  • Current DE was 1.9 times in 3q18 and the debt covenant limits DE ceiling at 4 times. There is no problem on funding side.

The internal restructuring with BFIT

  • SAWAD first bought the stake in BFIT in Jun-2016 due to SAWAD want to avoid the regulatory risk which might cap the interest rate charged to customer at 15% for loan contract according to civil and commercial code section 654 this would lead to operation loss for operators in the industry while BFIT holds the license of business of finance for commerce which allows the operator to charge interest over 15% accordingly to credit risk. Therefore, BFIT is the suitable target to mitigate this risk.
  • As of Jun-2018, SAWAD holds 45.34% in BFIT which represent to be the largest shareholder in BFIT and also consolidate BFIT in SAWAD’s book. Total investment in BFIT was 1,262.83 MB.
    • First transaction in 27 June 2016, SAWAD invested 157.44 MB for 9.84%.
    • Second transaction in 9 March 2017, SAWAD invested 514.01 MB for 26.51%.
    • Third transaction in 26 June 2018, SAWAD invested 591.39 MB for 8.99%.
  • The business model for BFIT after acquisition is that BFIT will be the lending vehicle via infrastructure of SAWAD such as branches, employees, software and technology, credit approval system and so on in order to charge the customer at the same rate and all of the loan contract which is generated within BFIT will be managed by SAWAD. Thus, SAWAD demands for loan management fee from BFIT in return.
  • SAWAD also has S2014, 100% owned subsidiary, lending to high ticket-sized customer of land and housing, 4-wheels vehicle and all of motorcycle-backed loan contract.
  • The Impact of Internal restructuring.
    • Lower of interest rate yield due to SAWAD had to transfer prior contracts which were generated under gray area to BFIT by doing so SAWAD offered incentive by lowered interest rate charged and subsidized VAT 7% for hire-purchase contract.
    • SAWAD has consolidate BFIT in the book since 1q17. Interest rate yield dropped from 28.42% to 20.6% in 1q18. NIM declined along with decreasing in interest rate yield even cost of funding was stable.
    • int.rate bift conso
    • In addition to license benefit, BFIT is able to raise deposit which has lower cost of funding than other source of funding. The funding structure of SAWAD has changed from mainly lean on borrowing from financial institution and debenture to balance with deposit for 30%.funding structure.JPG
  • After the regulation was clearly stated that the interest rate including penalty fee will be charged not exceed than 28%, the management said that they will do the business as the same and didn’t comment on the future operation with BFIT.
  • Loan management fee is composed of loan related services, collection services, loan management services. Loan management fee expense in BFIT was 28%, 30% and 41% of interest revenue in 1q18, 2q18 and 3q18, respectively.
    • SAWAD delicately designed to transferring most of the profit back to SAWAD even SAWAD holds 45% in BFIT.
    • As you can see on the table below that the actual profit to SAWAD is around 64% in the latest quarter (3q18) which composed of the portion of holding stake, loan management fees and interest expense paid to SAWAD from related loan to subsidiary with MLR – fixed rate.actual profit to sawad.JPG
    • Normal net profit to loan portfolio of this business is ranged approximately at 9-11% but BFIT only got around profit to loan portfolio.JPG

Loan growth

  • Total gross loan portfolio in 3q18 has grown to 28 bn increased by 18.2% YTD, the company is getting back on track and focusing on core operation which is loan growth and branch expansion.
  • Loan growth in 2017-2018 was stumble due to internal restructure and the company intend to let the low-yield contracts mostly hire-purchase contract run down since 3q17 where hire-purchase loan declined qoq for 5 consecutive quarters. The declining in hire-purchase contract led to the improvement in interest rate yield in the portfolio.

Loan growth.JPG

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  • Total loan portfolio in 3q18 (Hire-purchase portfolio and title loan) impressively grew by 30% yoy and 10% qoq while for 9 months of 2018 it grew by 21.84% YTD from 22,149 mb in Dec 2017 to 26,986 mb in 3q18 increased by 4,837 mb YTD. The contribution of loan growth mainly came from loan contract (BFIT and S2014) for 2,924 mb compares to 2q18 while hire-purchase portfolio was intentionally declining due to hire-purchase loan is low yield contract which was previously generated to avoid regulatory risk in 1q17 to 3q17. Regulatory risk has been resolved.
  • We saw the increasing of loan portfolio in S2014 which I assumed that the company has completed loan transition to BFIT and start to ramp-up motorcycle loan and SME loan in 3q18.

Loan s2014.JPG

Estimation of Market size in Motorcycle and Auto backed loan in Thailand

(Please note that this is the estimation from public and available information. It might not be exact and accurate.)

accumulated no. of registeration.JPG

  • There are 20.7 million motorcycles grew at 3% CAGR (2010-2017) and 15.7 million cars in the system in 2017 grew at 7% CAGR (2010-2017) as the potential target group but we can’t use those no. as a proxy of total size of the market due to not everyone who posses those asset needs money or a customer of micro-finance. In addition, the target group of these micro finance like MTC and SAWAD is not white-collar worker.

total pop..JPG

(Due to lack of information of no. of taxpayers in 2017, we use the no. of taxpayers in 2014 as a proxy instead).

  • Total Population of Thailand in 2017 was 66.19 million people and the target group of micro finance that focus on a low-income customer who lacks ability to access commercial bank will be approximately 33.5 million people derived from a no. of employed person who doesn’t pay tax combines with the people who is tax-exempt due to monthly income less than 15,000 baht. However, not all of those potential target group needs money or has asset to place as collateral.

potential market size.JPG

  • To evaluate the potential market size of motorcycle and 4-wheel vehicle backed loan, we use the accumulated no. of motorcycle registration in 2015 and accumulated car registration in 2013 due to normally people purchases via finance lease which has installment period approximately 3 and 5 years for motorcycle and car. Micro finance company usually gives LTV for motorcycle-backed loan only 30-50% that derives to avg. loan per contract around 10,000 – 15,000 baht and if we expect the potential target customers for 20% – 50% of total registered number, the market share of MTC and SAWAD is only at 13-33% and 4-9%, respectively or total market size for motorcycle backed loan is around 41bn – 102 bn baht.
  • For the Car-backed loan, we applied the same method and comes to the market share of MTC and SAWAD at 7-30% and 6-22%, respectively or total market size for this product is around 40bn – 156 bn baht.
  • Other financial products are difficult to evaluate the total market size.
  • Once the Bank of Thailand (BOT) officially supervises asset-backed industry we will see the total number of outstanding loan in the system.

Profitability index

  • As we mentioned that in the transition period SAWAD generated low-yield contracts to encourage transferring and changing the creditor to BFIT, NIM has dropped since 4q16 at 25.82% to the lowest point in 1q18 at 17.84% which dramatically hurt the profit of the company in the period and the interest rate yield picked up in 2q18 and continuously to 3q18 due to declining in low-yield contracts and the company gets back to generate normal yield contract.


  • In 3q18, Interest revenue grew by 23% yoy due to loan growth indicated 30% yoy while interest rate yield marginally increased, we saw the significant improvement in interest rate yield from 2q18 as management guided increased by 60 bps which contributed to interest revenue grew at 10% qoq. Cost of funding was maintained at the same level as 2q18 at 3.36% due to BFIT launched promotion to raise deposit which provided lower cost of fund compares to other sources of funding like bond or loan from bank. I think cost of funding will rise in the future because latest debenture issued in Aug-2018 with term of 4 yrs for 4.15% interest rate. Increasing in Yield and maintaining cost of funding in 3q18 send NIM to go up by 70 bps. Net interest income increased by 24% yoy and 11% qoq.

int income q.JPG

Available room for improvement

  • loan per branch of SAWAD is lower than MTC even though avg. ticket size per contract of SAWAD is higher than MTC. We think that SAWAD need to improve the efficiency and rapidly ramp up loan growth more to catch up MTC. This improvement will lead to higher profit growth from economies of scale benefit due to 75% of total cost was fixed.
  • The improvement of avg. loan per branch of SAWAD increased to 10.54 mb/branch in 3q18 compares to around 9.57 mb/branch in 3q17 but it is far below MTC’s figure that was shown at around 15 mb/branch. Avg. loan per contract of SAWAD was 43,895 baht/contract in 2017 vs. 22,000 baht/contract of MTC. Higher of avg. loan per branch of MTC relative to SAWAD can indicates two things the first one will be there is room for SAWAD to improve or SAWAD is so incompetent and operates with low efficiency. We didn’t expect SAWAD to have same number per branch with MTC but let’s imagine if SAWAD could improve this ratio what would loan growth and net profit growth will be?

Gross loan per branch.JPG

  • Looking at the cost structure in 2017 of this business, it is fixed cost business. Fixed cost represents around 75% of total cost which composed of personal expense for 50-53%, Depreciation and amortization for 5-7%, rental expense for 14-15% and 2% of utility expense. Therefore, every improvement of efficiency ratio would significantly impact change in bottom line.

cost structure.JPG

  • Even though, gross loan per branch has a big different gap and interest rate yield is nearly charged but net profit to portfolio of SAWAD is better than MTC due to the other and fee income that SAWAD yields around 8-10% vs. 2% of MTC. This difference came from the business policy of each operator such as SAWAD has 30% of total revenue contributed from non-interest income while MTC has only 10% contributed from non-interest income. The higher of fee income may partly be described the asset quality that MTC is better managed their customer than SAWAD (NPL of MTC for 3q18 was 1.26% vs. 5% of SAWAD for the same period) therefore, the portion of late penalty fee of MTC is less than SAWAD.
  • We think after the regulator stated that all benefit including late penalty fee must not charged exceed than 28% will encourage SAWAD to stricter than the past in order to control and improve asset quality in order to offset the declining in penalty fee in the future rather than compromised with the delinquent customer to get penalty fee as the past.

other and fee income.JPG

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Asset Quality

  • The asset quality of SAWAD remains the major concern due to high NPL relative to its peer like MTC or NTL (Ngern Tid Lor) in 3q18 SAWAD posed 5.02% of NPL vs. 1.26% of MTC for the same period and if we compare to NTL (private company) NPL in 2016 was only 1.36%. The main reason was that the company tried to compromise and negotiate with late-payment customers first instead of immediate foreclosure asset in order to maintain a good relationship with customers that led to high NPL.

NPL ratio.JPG

  • In 3q18, Khun Tida said even they have improved Asset quality by lower of NPL without write-off and AR sold in 3q18, they still think there is the room of improvement in asset quality after election in 2019 due to in 3q18, SAWAD compromised to approach late-payment customer by negotiation not immediate foreclosure because they are afraid of being in spotlight before election in 2019. The no. of asset foreclosure in 3q18 was down by 30% from normal period.
  • The company is now realized that the higher in NPL comes with increasing of provision cost and the company is likely to implement a stricter policy on late-payment customer after election 2019 which will help and drive down %NPL. Khun Tida expects %NPL at the end of 2018 declines to below 5% as same as ending of 2017.
  • The coverage ratio of SAWAD was considerably low compares to MTC and NTL. SAWAD reported coverage ratio (exc. Provision of previous business of BFIT) in 3q18 at 64.2% vs. 260% of MTC for the same period. I personally think that their provision might not be sufficient for IFRS9 implementation in 2020 but the impact of setting additional provision will be low due to the loss of asset foreclosure in this business , which will be used to determine loss given default, was low compares to total size of loan portfolio but we don’t know exactly how much additional provision is needed.

coverage ratio.JPG

loss on asset foreclosure.JPG

  • The reason of lower on coverage ratio came from an aggressive provision policy compares to MTC that SAWAD has deducted collateral before setting provision for every tranches of account receivable while MTC has deducted collateral of receivable only not yet due tranche to past due less than 90 days tranche and the receivable that was classified as NPL will have no collateral deduction before setting provision.

collateral deduction sawad.JPG

collateral deduction mtc.JPG

Risk: Insufficient of provision for IFRS9, problematic NPL from high ticket size customer, Deteriorating in asset quality, Loan growth less than market expectation, Rising cost of funding in uptrend of policy rate, declining in fee income.

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