ASII: its complexity masks its expensive valuation

The narrative of the automotive industry lately looks bleak: the first is the increasingly hot competition in the automotive business, the second is the emergence of a new era in the world of automotive, named electric vehicles (EV) and finally, improved transport infrastructure, including the birth of new startups, makes people think twice about owning a car.

But the reasons above are not things that make me bearish toward ASII.

First, competition is not new for ASII and I myself believe that automotive business is an infrastructure business. There is no point in having a good product but not equipped with a scattered after-sales service, availability of spare parts and a good auto-resale price.

While the story about EV I think will still long enter the Indonesian market because to build the EV community, it takes a considerable amount of funds and time.

The possibility is actually the third factor that does have an impact, namely the increase in utility vehicles so that people do not need the car as much as it used to be.

But, no, that’s not what makes me bearish for ASII.

My concern is more to the issue of valuation.

As we know, ASII has many kinds of business fields, namely:

• Automotive
• Financial service
• H/E & mining (UNTR, ACST)
• Agribusiness (AALI)
• Infrastructure & logistic
• Information Technology (ASGR)
• Property

Most of the ASII business fields have been listed on the stock market, while the rest are not.

Below is a breakdown of some ASII businesses:

	Mcap (IDR bio)	ASII’ ownership	E17*	1H17 BV	Subsidiaries’ profit that belongs to ASII	Subsidiarie’s market cap that belongs to ASII
ASII IJ	318,808		19,647
UNTR IJ	113,023	59.50%	7,024	44,764	4,179	67,249
AALI IJ	28,389	79.68%	2,078	17,899	1,656	22,620
BNLI IJ	20,191	44.56%	1,421	21,428	633	8,997
AUTO IJ	13,447	80.00%	881	10,564	705	10,758
ASGR IJ	2,032	76.87%	300**	1,173	231	1,562

*Bloomberg estimate.

**my rough estimation.

From the breakdown above, the market hopes that ASII’ non-listed business is expected to book a net profit of IDR 12,243 billion in 2017. This is a tough job for ASII’ non-listed companies that are still dominated by automotive business and financial services.

If broken down in market cap, the market cap of ASII’ listed business is IDR 111,186 billion, which implies that ASII’s non-listed business market cap is IDR 207,622 billion.

If we divide IDR 207,622 billion with IDR 12,243 billion, we get non-listed ASII’ business valuation at 16.96x E17.

Once again I emphasize that until now ASII’ non-listed business is still dominated by automotive business and financial services.

At 16.96x E17, I feel that ASII’s current non-listed business valuation is very expensive. The table below is a comparison between ASII’ non-listed business with similar companies around the world:

	Mcap (USD bio)	P/E17
ASII’non listed	15.61	16.96
7203 JT	161.47	10.60
7201 JT	37.72	7.69
FCAU US	24.38	6.31
BMW GY	61.51	7.21
VOW3 GY	72.30	5.27
AVERAGE		9.00

The average valuation of automotive companies worldwide is 9x E17. In fact, the average valuation is only 7.42x E17 if we remove ASII from the calculation.

The valuation gap between 16.96x E17 and 7.42x E17 is too wide to ignore. Especially considering the Indonesian automotive industry has not experienced growth in the last 3 years.

UNDERWEIGHT ASII. Its complexity masks its expensive valuation.
Risk: ASII is a proxy of liquidity. In addition to fundamental factors, liquidity in the market can affect ASII price movements in the short term. 

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.

The rise of commodity

“US consumer confidence climbed higher in August”

“US economy has strongest quarter since 2015”

“France growth pace holds at 0.5%”

“Italian economic confidence hits post-financial crisis high”

“German inflation heats up more than forecast in August”

“Eurozone economic confidence hits pre-crisis high”

“Chinese exporters report rising volumes and prices”

“Japan retail sales growth outperform despite faltering consumption”

“Japan’s labour market strongest since 1974”

The above sentences are headlines that adorn the financial media in recent weeks.

The recent financial news in the media is very different from the news of the past decade.

At a glance, the above sentences describe the recovery as well as a fairly convincing global economic growth.

Usually, after the initial recovery, confidence is up and the economy is gaining momentum. This is the healthiest period of the business cycle, in a sense because economic growth can be robust without any signs of overheating or sharply higher inflation. Typically, there is increasing confidence, with consumer prepared to borrow and spend more as unemployment starts to fall. Concurrently, business build inventories and step up investment in the face of strong sales and increased capacity use. Higher operating levels allow many businesses to enjoy lower unit costs, so that profits rise rapidly. As the effect of economic expansion, demand for basic industry and materials categories such commodities reaches a zenith and show period of bull market cycle.

Therefore, I am bullish on the commodity sector, especially metal (nickel and tin).

I know, guessing the direction of commodity prices is a futile job, but we still have to guess the direction of commodity prices in investing in commodity stocks. Waiting for clearer data is a late act.

After suffering over the past decade, many mining companies are tightening their belts by reducing capital expenditures. In turn, this action will not increase the supply. On the other hand, as shown by the economic cycle above, sooner or later demand for commodities will soon increase if recovery and economic growth continue. The imbalance of demand and supply will increase commodity prices.

Some might ask, is it not too late to get into the commodity sector at the moment, given that commodity prices have soared?

Fair enough, because nickel prices have gone up 15.62% since the beginning of the year:

And the price of tin was not left behind:

But if we look more closely, a sharp rise in the price of nickel and tin only occurs when viewed from the bottom that incidentally occurred in June-July17.

In fact, nickel only rose 15.62% while tin even down 1.91% compared to the beginning of the year.                    
We seem to have to wear larger glasses to see this:

Visually, it appears that the price of nickel and tin is currently below the average price over the last decade.

There were no signs of bubbles in the nickel and tin.

And INCO and TINS stock valuations are not too expensive:

	Mcap (USD mio)	P/E18	PBV17	10Y PBV
INCO IJ	2,059.00	57.29	1.20	2.45
VALE US	57,097.90	11.66	1.30	2.56
TINS IJ	591.30	17.56	1.23	2.49
SMELT	87.60		1.41	1.35

I believe the high valuation of the above stocks by P/E is due to the delay of analysts revising the current nickel and tin prices. Whereas stock prices of commodity firms follow commodity price movement rather than waiting for the company's earnings, so investing while waiting for cues from analysts and the release of profit will always be too late.

Although we should not be too optimistic, but the fact is that the price of commodities is still below the average price over the last decade.

And the price of mining stocks was below the average of the last 10 years (on PBV basis).

In conclusion: the potential for rising demand, no additional supply and relatively low commodity prices and stocks are sufficient catalysts to increase the weight of commodity stocks in the portfolio. Although guessing the direction of commodity prices can be categorized as an act of speculation, but in the current case, speculation is done with more caution.

Overweight INCO & TINS for a period of one year ahead.

Disclaimer: This article is not a recommendation to conduct transactions on the intended securities. Any consequences arising from this writing are beyond the responsibility of the author.