Vehicles sales surge 48% yoy in February

Toyota Motor Corp yesterday reported a 48% yoy jump in new vehicle sales in February to 39,661 units. Toyota earlier predicted a 15% rise in car sales this year to 470,000 units but said that its target may be surpassed after spectacular growth in the first two months of this year. In January vehicle sales surged 52.7% yoy to 37,797 units.

Among stocks expected to benefit from the continuing strong growth in vehicle sales are major finance companies such as NFS, KK, SICCO and TISCO as well as pure leasing companies i.e. SPL, THANI and NVL.

Sales of passenger cars and motorcycles will also be spurred by this month's 0.25% cut in lending rates by most commercial banks. At the same time, however, finance companies' margins will be squeezed by lower yields on loans and fiercer competition in the sector. This will be mitigated to some extent as finance and leasing companies focus on higher-margin but higher-risk sectors.

THANI, for example, aims to boosting lending to the pick-up truck segment from 19% of total loans last year to 49%. Other companies such as SPL, TISCO and NFS have recently accelerated efforts to win a larger portion of the used car financing market, THANI's traditional area of expertise.

Another area in which finance companies can bolster yields is prudent management of their costs of funds. Given the downward pressure on interest rates, finance firms which have a large proportion of their debt at floating rates, should see a smaller decline in their margins than companies who are locked into fixed rates. For major finance companies, most of their lending costs are fixed as the majority of their funds come from promissory notes (P/Ns) with maturities of 3-6 months.

Pure leasing companies can’t raise funds via P/Ns and therefore rely on bank loans and/or debentures. This normally locks them into lending contacts lasting a year or more and reduces their flexibility in maintaining or improving margins. As our table below shows, THANI has a clear advantage in this regard as half of its borrowings are at floating rates.

Despite the improving prospects for loan growth, the finance sub-index (SETFIN) has

underperformed the SET index by 19% since the beginning of this year. This is partly due to the high-beta nature of finance stocks which tend to be among the biggest losers in any market downturn. Another reason for the sector's poor performance is concerns of future de-regulation of the banking and finance industries.

Commercial banks may eventually be allowed to offer a full range of financial services – including car hire purchase, but we don't believe it will be within the next year. Once the US-Iraq crisis is resolved, we believe the market will refocus on the finance sector's near-term earnings performance and strong loan growth. As a result, we are maintaining our OVERWEIGHT rating on the finance sector