Depreciation costs and production changes to trim 4Q02 earnings

We expect Yuasa Battery (Thailand) Plc (YUASA) will post 4Q02 earnings of Bt18.8mn, up 10% qoq but down 32% yoy. Although the final quarter is traditionally the high season for battery sales, YUASA’s earnings will be hurt by two factors: 1) higher depreciation charges following the opening of its new plant last month; and 2) a temporary production slowdown due to increased emphasis on production of higher-margin, maintenance-free batteries.

We expect YUASA’s earnings to rise 22% in 2002 to Bt89mn and 15% this year to Bt102mn. Sales are forecast to grow 15% this year, bolstered by the continuing boom in auto sales. Toyota Motor Corp yesterday reported that auto sales surged 52.7% yoy in January to 37,769 units. This follows vehicle sales growth of 37.8% to 409,362 units last year.

YUASA is trading on an attractive 2003 PER of 5.89x, EV/EBITDA of 3.66x and P/BV of 0.65x. It also offers a handsome dividend of Bt1.8, representing a yield of 6.4%. Based on our DCF model, we have a target price of Bt35 a share for YUASA, indicating an upside of 25%.

YUASA's income statement (Mn Bt)

Note: COGs does not include Depreciation and Amortization

• Recent data from the Bank of Thailand showed that battery production grew 14.4% qoq and 26.6% yoy to 3.39mn units in 4Q02. Domestic battery sales in that period rose 21% qoq and 28% yoy to 1.97mn units. The final quarter is usually the high season for battery sales but YUASA’s management has cautioned that its 4Q02 sales will fall below the industry’s growth due to changes in the production line to maintenance-free batteries. Accordingly, we expect YUASA’s sales to grow just 12.5% qoq and 15.7% yoy to Bt280.7mn.

• YUASA’s gross margins are estimated to narrow to 24.8% from 25.3% in 3Q02 due to the company booking depreciation costs of its new plant.

• The company’s older plant is currently operating at full production capacity of 840,000 auto batteries and 2.4mn motorcycle batteries per year. Phase one of the new factory, which cost Bt520mn, will expand YUASA’s production capacity by 440,000 auto batteries and 700,000 motorcycle batteries per year. Management is targeting sales growth of 15% in 2003.

• YUASA’s financial position remains strong despite its hefty investment in its new factory. Debt increased by only Bt193mn in the first nine months of last year, with gearing at an estimated 0.12x at year-end.