Hinopak Motors Limited

Hinopak Motors Limited (PSX: HINO) is a market leader in Pakistan for light and heavy commercial vehicles. The company assembles buses, trucks and a few models of prime movers while Hino's special purpose vehicles are engaged in hauling a variety of supplies, such as food, equipment and machinery. The company has two plants; one for chassis and another for body manufacturing hailing current capacity of 6000 and 1800 respectively.
The company's market share in the trucking industry is about 45 percent (in the Jun-Jul period) backed by a strong Hino brand, a vast dealership network and after sales services support. Hino also exports some of its products to the Middle Eastern and African countries.
Hino was established in 1986 by UAE-based Al-Futtaim group and PACO Pakistan through a collaboration of two Japanese companies Hino Motors and Toyota Tsusho Corporation (TTC). In 1998, PACO Pakistan and Al-Futtaim disinvested in the company, leaving the two Japanese companies (Hino Motors Japan and Toyota Tsusho Corporation) to take over control.
The Japanese partners own 89 percent of the shares of the company with Hino Motors as the holding company since 1998 with 59 percent of the shares and nearly 30 percent held by Toyota Tsusho. The company's board of directors mostly names from the parent company with few locals. Only 5 percent of the company's shares were held by the public as at March 2017, while NIT/ICP and mutual funds etc. together held about 7 percent of the company's shares. Operational performance - production and capacity (year ending March)
According to the company's annual report, Hinopak is the only commercial vehicle company with an advanced body manufacturing facilities other than its chassis assembly plant. That may be true as the company is leading the market. Though with a capacity of 1800 units, the company has been manufacturing a quantum of 400-500 bus bodies-a capacity utilisation of only 26 percent. Despite low volumes, and recent slowdown, the company maintains a market share of 60 percent in the bus category.
Demand for buses have been falling in the country in the past year or so with perhaps higher share of imported buses coming into the country and demand for all local players falling. Another possibility is the demand itself is falling with the coming of new metros in Islamabad and Lahore. However, inter-city travel has clearly expanded in the country with so many new bus travel services being launched while current bus services are adding from vehicles to their fleets.
In either case, since body manufacturing for Hino is demand driven, given a much higher volumetric capacity and 'modern and integrated' manufacturing process that makes it competitive (company's own words), this is an area that is underutilised-the company could think about growing its exports in this category.
Its second segment is chassis making. Chassis are the lower part of the vehicle, consisting of the frame on which the body of the trucks is built. The company produced about 3817 chassis, which has historically remained on the same levels. The plant has a capacity of 6000 units. In addition, the company has also been making Hilux frames for Indus Motors Company. Though capacity is not noted, but the Hilux frames have only been growing over the years, testament to Indus Motors' pickup demand. In trucks, the company has a market share of 41 percent as at March 2017.
Financial performance - (year ending March)
During March 2016, the company invested Rs 370 million and during March 2017, investment was Rs 312 on capital goods to enhance and raise productivity and upgrade technology. Total volumetric growth has been considerably decent despite the recent slowdown in bus demand. The company grew its total quantum sales by 23 percent in March 2017 and 13 percent in March 2016. Fortunately, the company recently announced its year ending results for March 2018 to the PSX where revenues saw a growth of 18 percent. Revenues grew by 24 percent in March 2017 and by a whopping 43 percent in March 2016. During March 2016, the revenues were much higher than sales number owing to higher truck sales. Trucks carry higher price tags than any other variant so sales mix matters; revision in price is also a possibility. In fact, between 2015 and 2016, the company's revenue per unit of sale grew by 27 percent at Rs 2.1 million against Rs 1.625 million (these have been computed for the purpose of this brief recording).
Though the company has significant localisation, parts procured locally are dependent on steel and other metal imports which may become expensive when global commodity prices go up. Steel prices have been on the rise for the past year or so, that let margins for Hinopak slide down from 15 percent during the March 2016 period to 11 percent during the March 2017 period, and remained on this level in the March 2018 period. The company also imports some parts from abroad which are themselves subject to commodity price changes as well as currency depreciation.
During the outgoing year, the company managed to tighten the purse strings on its indirect costs including administrative, distribution and other expenses-which fell from 4.2 percent to 3.7 percent of the revenues. But higher than expected finance cost because of higher borrowing and exchange losses brought net margins down to 4 percent in April-March 2018 against 5 percent the period last year. Better direct cost management would go a long way in improving its margins as the company has kept its indirect costs low despite exports' higher distribution costs.
Opportunities and outlook in the commercial segment
Trucking industry and logistics are expected to pick up much faster once the CPEC infrastructure is built and greater activity is seen on the two routes. Hinopak being the market leader in trucks will get a strong boost to its sales and has the capacity to cater to higher the higher demand. Challenges such as adverse foreign exchange could take costs of production up, while the rise of used and resold trucks in the market continue to curb the demand for fresh vehicles. With the new transport policy that might get implemented soon, the overuse of old dilapidated trucks may get reduced.
The company's biggest concern should be the increasing competition. Not only are there are a couple of new greenfield and brownfield ventures looking to start local assembly, some major global players are looking to enter the market through local distributors and CBU imports. As CPEC gains momentum, more players might enter, especially the Chinese ones which are going to be a lot price-competitive.
CPEC isn't the only major demand driver either. In fact, growth is being seen in the industrial and manufacturing sectors, not to mention retail and trade where better sophisticated logistics solutions will be needed by logistic companies that procure their fleets. For instance, there are huge demand prospects in the medical industry for drugs transportation or in the agriculture industry by way of strong cold chain solutions. Quality of the vehicles will matter to logistics companies and Hino needs to optimise of this demand.
While more players may pose a threat to Hino's market share, it would depend on how fast new players localise, how effective their marketing and outreach is, whether they will have a dealer network to reach markets beyond the major ones and would they compete with existing players on price or quality. One can't say for certain what the impact on Hinopak would be, until these issues are clear.

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Pattern of Shareholding (as on March 30, 2017)

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Categories of Shareholders                                                %

Associated Companies                                                 89.00%

Hino Motors Ltd. (Hinopak Motors Limited is Toyota Group Company and

subsidiary of Hino Motors Ltd., Japan. Toyota Motors

Corporation is the ultimate parent of the group)                     59.33%

Toyota Tsusho Corporation, Japan                                     29.67%

NIT and ICP                                                           3.55%

Executives                                                           0.003%

Banks, development finance institutions, non-banking                 0.002%

finance companies, insurance companies,

takaful, modarabas and pension funds

Insurance companies                                                  0.002%

Modrabas, Mutual funds and others                                     3.00%

Public                                                                   5%

                                                                       100%

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