united motors lanka plc equity researchunited motors lanka plc is a licensed importer and...

LOLC SEC ValuationShare PriceUpside/(Downside)Risk Level(refer page 22 for recommendation)

Share Details

Bloomberg Ticker UML SL

CSE Sector Motor

GICS Sector Consumer Discretionary

Market Cap (LKR Mn) 9,868

Issued Quantity (Mn) 101

30-day avg T/O (LKR Mn) 0.88

Beta (6 months) 1.02

Investment Fundamentals

LKR Bn 12MTrail. 2016(F) 2017(F) 2018(F)

Revenue 11.07 14.83 17.95 19.96

Net Profit 1.42 1.62 2.09 2.66

S/H's Equity 10.44 11.41 12.66 13.99

Total Assets 13.15 14.90 16.81 18.62

ROA (%) 12 11 12 14

ROE (%) 15 14 17 19

Price MultiplesPE (X) 6.95

PBV (X) 0.95

Price to Sales (X) 0.89

Divdend Yield (%) 6.13

Price Behavior

Per Share Details as at 30.06.2015 (LKR)

Earnings per share (trailing 12m) 14.08

Net Asset Value per share 106.53

Sales per share (trailing 12m) 109.75

Dividend Per Share (trailing 12m) 6.00

Business Nature

Shareholder Details

Yaseen M A 61%

Yaseen R R 11%Chrysostom S M 7%

Shareholders below 5% 21%

Source:CSE, Bloomberg, LOSEC Research

Analyst (s)

Gayan Rajakaruna

[email protected]

01 October 15

Recommendation Guidance, Important Disclosures and Analyst Certification: Page 22

Salient Sections of the Report

Motor sector to rise up with increase in per capita income (pg.2)|Mitsubishi continues to be a

dominant player (pg.4)|Strong agency model to attract strategic brands (pg.5)|Diversified

product portfolio (pg.8)| Strength in value chain (pg.9)|Strong balance sheet (pg.10)| Flexible

on changes in macro-economic variables (pg.11)| Valuation (pg.12)|Sensitivity (pg.13)|

Earnings risk comment (pg.13)|Appendices (pg.14 ) +94 117 880837

Investment Considerations

Motor sector to grow with GDP per capita rise and consumption expenditure growth:

We expect motor sector to be one of the fastest growing sectors in the Sri Lankan economy in

short to medium term. Transition through mid-income economy and low vehicle penetration

are expected to create a strong demand for motor vehicle purchases.

Mitsubishi continues to be a dominant player: UML is the sole distributor of brand new

Mitsubishi passenger and commercial vehicles and has been able to consistently maintain a

strong market share (>24% of brand new Japanese units imported) during last 9 years

despite of competition from other brands. Mitsubishi is one of the oldest and leading global

automotive player and is familiar, trusted name amongst Sri Lankans, giving a competitive

advantage for UML to stand above the competition.

Strong agency model to attract strategic brands to country: Apart from the strategic

connection with Mitsubishi, UML has been able to timely introduce strategic brands such as

Perodua, DFSK, JMC and TVS to capture a notable market share by utilising its cost effective

and efficient agency model.

Diverse product portfolio with wider brand spread: UML has the most diversified product

and brand portfolio over its sector peers which enables it to mitigate risk on dependence on

one product from external fiscal shocks.

Strength in value chain: UML has strengthened its presence in motor sector value chain

through vehicle assembly operation, reputed after-sales service operation and related

diversification into products such as lubricant oil and tyres.

Strong balance sheet to provide convenient funding options: UML has consistently

maintained near zero long-term debt position over the last 5 years and hence can

conveniently leverage up for prospective investment opportunities.

Valuation

We assume a cost of equity of 15% for our valuation which is a 7% premium on 3 year

treasury bond rate(GOSL), taking into consideration the equity market risk and industry

volatilities. Accordingly, We have valued the counter using FCFE model and derived the value

of a share at LKR 144.00. At the current value, counter is trading at a discount to our

valuation. We give a Buy recommendation for UML.

United Motors Lanka PLC

Initiation Coverage

BUY

United Motors Lanka PLC is a licensed importer and

distributor of motor vehicles. It markets a range of

automotive products, from top-end luxury vehicles to three-

wheelers and motor bikes, and from car parts to lubricants

and tires.

LKR 144.00LKR 97.80

Medium47.24%

Robust Agency Model tapping consumption growth

We expect affordability of vehicle ownerships to grow up in tandem with expected per capita

income rise in Sri Lanka. UML is positioned well to benefit on consumption growth, given its

strong product portfolio backed by Mitsubishi and the robust agency model over its peers.

UML's efficient trading model and capabilities in vehicle assembling will also enable it to

respond for frequent market changes while UML can conveniently leverage on its strong

balance sheet for further expansions.

Equity Research

7580859095

100105110115120

01-Oct-14 01-Jan-15 01-Apr-15 01-Jul-15 01-Oct-15

LK

R

UML Share Price ASI movement (adjusted to UML base price)

Initiation Coverage: United Motors Lanka PLC | 01 October 15

Graph 1: Correlation of GDP per capita and vehicle population Graph 2: Correlation of GDP per capita and vehicle registration

Consumer Discretionary

Source: Dept. of Motor Trafic, LOSEC estimates Source: Dept. of Motor Trafic, LOSEC estimates

Graph 3: Correlation of GDP growth and consumption exp. Graph 4: Transport expenditure increasing over last 5 years

Source: CBSL, LOSEC estimates Source: CBSL, LOSEC estimates

Table 01: Correlation of different variables

Source:CSE, Bloomberg, LOSEC Research VariableGDP per capita and vehicle population 0.99 Strong positiveGDP per capita and new vehicle registration 0.68 PositiveGDP per capita and transport expenditure 0.98 Strong positiveTotal private consumption and transport expenditure 0.99 Strong positive

2 | LOLC Securities Limited

Cofficient of Correlation Correlation

Motor sector to rise up with increase in per capita income and consumption expenditure growth

Total vehicle population of the country has climbed up to 5.6 million in 2014 while posting a strong correlation

between growth of vehicle population and per capita income over the last ten years. Accordingly, we expect Sri

Lankan economy to show a strong growth in the future despite of the short term volatility, and vehicle population to

hit 7.5 million by end of 2017.

By end of 2014, new vehicle registrations increased by 31.5% YoY while 1H2015 registrations posted a 90% YoY

growth adding a 314,155 vehicles to the country. Despite certain historic vehicle volume dips largely due to import

duty changes, the records indicate that the new vehicle registrations have posted a 13% CAGR during the last decade,

qualifying to form a positive correlation with per capita income rise over the same period.

Sri Lankans will spend

more on vehicle

purchases

Sri Lanka’s private consumption expenditure has also expanded over the last five years while posting a 15% CAGR by

2014 with consequent to rise in per capita income. Transport expenditure accounts for over 20% of annual

consumption expenditure in Sri Lanka since 2008 and has become the second largest category after spending on food

and beverage.

Being a key component of total consumption expenditure, transport expenditure over the last five years demonstrate

a strong correlation with rising per capita income signaling that the expenditure on transport is likely to increase

proportionately with the anticipated increase in per capita income thus resulting an increase in demand for motor

vehicles. Therefore growth in the private consumption will bode well for the increase in demand of passenger

vehicles, motor cycles and three wheelers offered by UML in years ahead.

Total vehicle population

will hit 7.5mn by 2017

1000

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Vehicle Population GDP Per Capita Income(USD)

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ou

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New Vehicles Registration GDP Per Capita Income(USD)

5.0%

5.5%

6.0%

6.5%

7.0%

7.5%

8.0%

8.5%

0

1,000

2,000

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2010 2011 2012 2013 2014

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GDP Ttl. Pvt. consumption expenditure GDP growth rate

0

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0

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7,000

2010 2011 2012 2013 2014

Transport Ttl. Pvt. consumption exp. excl. transport GDP per capita

LKR Bn LKR


Source: Worldbank Source: Worldbank

Source: Dept. of Motor Trafic, LOSEC estimates

Source: CBSL, LOSEC estimates

2 | LOLC Securities Limited 3 | LOLC Securities Limited

Low motor vehicle penetration and vehicle density

Graph 5: Motor Vehicles per 1000 people** Graph 6: Vehicles per 1 km

Apart from the macro economic outlook, Sri Lanka's vehicle penetration (vehicles per 1000 people) and vehicle

density (vehicles per one kilometre) are relatively low compared to regional peers. Therefore, we believe that the

sector has a potential to grow along with the targeted per capita growth and the extension of road network.

** Motor vehicles include automobiles, SUVs, trucks, vans, buses, commercial vehicles

and freight motor road vehicles but do not include two/three-wheelers. Population

refers to midyear population in the respective year.

0

50

100

150

200

250

300

350

400Vehicles

0

50

100

150

200

250Vehicles


Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates

Source: Annual Report,Dept. of Motor Trafic Source: Annual Report,Dept. of Motor Trafic


PHEV will outperform as

Mitsubishi being the first

to introduce this

technology to SUVs

Graph 7: UML will maintain minimum 27% market share of Mitsubishi

Graph 9: FY15/16 looks positive for Mitsubishi SUVs

UML has been able to consistently manage its market share of Japanese brand new vehicles over 24% since 2006

except in 2011 signalling its strong presence in the local vehicle market. Considering the average historical market

share combined with the planned investments on brand building and marketing initiatives, workshop and facility

upgrading and new product launching, we estimate that UML to maintain minimum 27% market share in the next

three years.

Mitsubishi continues to be a dominant player in Sri Lankan motor sector

We believe that the SUV sales will be rebounded to average sales volumes during FY15/16 with the introduction of

“Mitsubishi Outlander Plug-in Hybrid Electric Vehicle (PHEV) during the latter part of the last year. With growing

demand for fully and hybrid electric vehicles due to its fuel efficiency, PHEV is expected to be the next growth product

of luxury vehicle segment. However, the growth prospect of PHEV could be faltered in the present context due to lack

of island-wide coverage of electric charging posts, excessive demand for the existing charging points in Colombo and

limited mileage capacity associated with electricity based driving.

UML is the sole distributor of Mitsubishi passenger and commercial vehicles in Sri Lanka and holds a 28% market

share of the total Japanese brand new vehicle imports by FY14/15 while controlling 9% of the total vehicle market.

Mitsubishi Motor Company (MMC) of Japan has consistently maintained its position as a leading automotive brand in

the world for its products’ quality, performance and price affordability enabling UML to leverage the popularity of

Mitsubishi brand in the local market. Further, with the exclusive distribution right of brand new Mitsubishi vehicles,

UML would face less competition in brand new Mitsubishi vehicle segment.

UML has been tapping high end luxury vehicle segment through its flagship SUV “Mitsubishi Montero” since 1998.

Montero attracts high income people who seek a luxury vehicle with a strong brand name which goes along with their

standard of life and has now become a trusted name amongst high end business community and professionals.

Affluent Sri Lankans prefer to use brand such as “Montero” or “Prado (by Toyota)” to express their status quo. This

social perception has created a strong leverage for UML to position itself in the high end vehicle segment over its

competitors.

Mitsubishi Montero is a

household name in Sri

Lanka to represent the

status quo of wealthy

people

Graph 8: Mitsubishi SUV will continue to be a dominant

product with strong market share

Proving the success story of Montero, UML has been able to sell approximately 4,777 SUVs registering above 15%

share over last 4 years. However, SUV sales in FY14/15 had a decline largely due to tapering off the vehicle permit

schemes which was granted for state employees to import brand new vehicles and the absence of a hybrid vehicle in

its product portfolio to leverage on the booming hybrid vehicle market conditions arising out of lower import duties

of this category. However this downside impact has been negate to a certain extent via increased demand for

“Mitsubishi Outlander” due to its technical sophistication and reduced pricing compared with Montero.

UML will leverage on

Mitsubishi brand

Mitsubishi vehicle and

spare part sales account

for 69% of Group's

topline

10%

15%

20%

25%

30%

35%

40%

45%

0

1000

2000

3000

4000

5000

6000

7000

8000

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015(F)2016(F)2017(F)

Mitsubishi share

Brand new Japaneseunits imported(excl.Mitsubishi)

Market share%

Un

its

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2010/11 2011/12 2012/13 2013/14 2014/15Mitsubishi SUVs SUVs excl Mitsubishi Mitsubishi share

Units

0%

100%

200%

300%

400%

500%

600%

700%

800%

900%

1000%

020406080

100120140160180200220240

Jan Feb Mar Apr May Jun Jul Aug

2014 2015 MoM Growth

SUV registrations has improved between 2014 and 2015 MoM

Units


Source: Annual Report,Dept. of Motor Trafic, LOSEC estimates

Source: Annual Reports

Success story of Perodua reflects UML's strong agency model

Source: Annual Report,Dept. of Motor Trafic


Perodua Axia is now

ready with advanced

features and competitive

prices for the next sprint

Graph 10: UML has been able to make strategic decisions to gain on growth phases of the economic cycle and secure on

motor sector challenges

Strong agency model to attract strategic brands to country

UML was able to recognize Malaysian brand Perodua as a good and affordable product for small car market and

introduced its first Malaysian product to local market in 1997. With the introduction of 'Perodua Viva' in 2008, the

company achieved a remarkable success in this segment during last five years while transforming the relatively

unknown Malaysian brand to a well-known more demanding car product in the local market. UML was successful in

reaping the tax advantage emerged in 2010 and sold over 4400 Perodua cars in 2011 while capturing a significant

market share of the same. Due to its availability and marketability backed with strong after sales services, Perodua

Viva sales were very impressive in previous years despite significant increase in taxes in 2012, till the manufacturer

decided to halt the production of the car in 2H2014.

Perodua Viva had a significant downfall in 1H2015 since UML was unable to timely capitalize the tax reduction in

small cars due to the manufacturer's delay in supplying a successor to 'Perodua Viva'. However UML has now

managed to offer 'Perodua Axia' for the small car market (<1000cc) which has seen a significant growth potential

under low tax environment. 150 Perodua Axia cars have been registered for the last two months and we estimate a

moderate sales volume of 500 units in FY16 and 1000, 1100 units respectively in FY17 and FY18 and anticipate a

drop in volumes due to probable import duty changes in this category in coming years.

Strong agency model that

exists within UML makes

it difficult for competitors

to penetrate into

UML was able to secure Mitsubishi dealership during its early days which led the company to create an edge over

competition as a trading business. The connection which has been built with Mitsubishi over the years has now

enabled UML to have a cost effective and efficient trading model which will place UML ahead amongst other vehicle

importers. Further, while maintaining close ties with Mitsubishi UML has also shown its capability in bringing other

strategic brands such as Perodua, DFSK, JMC, TVS and MG to the country in a timely manner and capturing the market

share within a short span of time.

Historically, the management of UML has been capable of introducing right brands/ products to the local market in a

timely manner in order to strategically respond to challenges stemming from ever changing import duties and other

macro-economic variables (interest rates, exchange rates, fuel prices). We believe that given its strong relationships

with principles, UML will continue to follow the same strategy by keeping the right vehicles ready to be marketed

upon changes taking place in import duty structure.

-

100,000

200,000

300,000

400,000

500,000

600,000

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-Aug

New

veh

icle

reg

istr

atio

ns

Reduced taxes and fasteconomic growth leading to rapid expansion in motor sector

No excise duty levied by Gvt. on assembled vehicles making them half the price of imported ones

Reduced taxed on hybrid vehicles and electric vehicles

Reduced taxes on small cars, reduced fuel prices and increased per capita income leading to a growth in vehicle registrations of motor cars, motor cycles

- Introduction of local assembly facility to capture increased demand of SUVs by permit holders

- Launching TVS King three wheelers

- Introduction of Mitsubishi Outlander and increased supply of Perodua Viva to gain from reduced taxes (35% reduction in cost of passenger vehicles)

- Added new Mitsubishi Montero to capitalize increasing demand from permit holders

- Introduction to DFSK mini truck to gain on tax advantage

- Launching TVS Vego scooters to respond to growing demand of motor cycles

- Commencing assembly of vehicles with Chinese origin

- Added Mitsubishi PHEV to seize tax benefits on hybrid vehicles

- Introduction of Perodua Axia due to increased demand on small vehicles emerged due to tax reduction in interim budget 2015


Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates

(***single cab category includes mini trucks and cab shaped vehicles)

Graph 13: UML has better gross profit margins over peers Graph 14: UML's operating margins are above the peers

Source: Bloomberg Source: Bloomberg


Graph 11: Perodua Viva/Axia demand growth Graph 12: UML expects a growth in DFSK market share

High performer amidst market disruptions - DFSK Unimo Lokka

MG Brand, a new segment

Strong agency model to attract strategic brands to country (cont…)

UML's relationship with

SAIC

Another strategic brand 'DFSK Unimo Lokka', a small commercial truck specifically developed for Sri Lankan terrain

was introduced to the market in 2011. Despite a disproportionate tax structure made available to DFSK in 2H2013

and also being a new and unknown brand competing against established ones, Unimo Lokka has been able to capture

10% of the small truck market within just 20 months of its market entry.

DFSK sales volume saw a dip in 2014 after increase in duty. However with reinvestments in brand building and

emphasize on its specific value proposition, approx. 807 units have been sold in Jan-Aug 2015 providing a good

indication about its marketability in the local market. In last six months, it has sold about 110 monthly average of

DFSK trucks while a consistent market share has also been maintained over last 4 years. With these impressive track

records fueled by strong after sale services along with continuous introduction of new models to its portfolio, we

estimate around 1300 units to be sold in FY16 with 10% YoY growth for following two years while ongoing tax issue

also taking into consideration.

UML launched Morris Garages (MG) in 2014 as a luxury sport car model and introduced the automatic version of it in

2015 to fill the gap of this segment. While UML looks forward to expand the product portfolio into larger sedan

category through MG model despite the product being in the early stage of the life cycle, UML has an agency

relationship with a large player such as SAIC Motor Corporation, one of the big four Chinese automakers who has

introduced MG to UML.

UML to leverage on cost efficient trading model

UML has been able to consistently maintain gross and operating margins above the peers indicating its ability to

efficiently manage the cost side of the business.Higher GP and Operating

margins

DFSK plans to capture

10% market share in

single cab category

-100%

-50%

0%

50%

100%

150%

200%

-

500

1,000

1,500

2,000

2,500

3,000

3,500

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4,500

5,000

Perodua Viva/Axia sales (units) YoY Growth

Units

3001517 1176 860 807 1300 1430 1573

0%

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4%

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10%

12%

02000400060008000

100001200014000160001800020000220002400026000

2011 2012 2013 2014 2015-Aug 2016(F) 2017(F) 2018(F)

DFSK Mini truckNew registration of 'single cabs' category***Market share

Units

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014 2015

UML DIMO COLOASHO SMOT AUTO

%

-

2

4

6

8

10

12

14

16

18

2010 2011 2012 2013 2014 2015

UML DIMO ASHO SMOT AUTO

%


Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates

Graph 15: Market share of TVS motor cycles above 10%

Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates

Graph 17: Financial forecast of TVS Lanka

Source: Annual Reports, LOSEC estimates


Strong agency model to attract strategic brands to country (cont…)

Considering last 6 months' TVS motor cycle registrations, we estimate about 32,000 units to be sold for FY16 with

20% YoY volume decline subsequently due to possible changes in duty structure along with shifting peoples' buying

sentiment from 'two wheel drive' to a small car in par with expected increase in spending. However we believe TVS

motor cycles to increase its market share from 10% to 13% in future years due to product quality and aggressive

branding strategies.

3-wheeler market has seen a rapid growth in early 2000 and saw a growth decline in 2012-2014 due to market

saturation combined with unfavorable import duties. However, we expect a moderate market growth in the coming

years considering increasing usage and relatively shorter churning period of commercial 3-wheelers. Accordingly, we

would estimate a moderate figure of 7000 units for FY16 taking last 6 months' registrations in to account. Our

estimate will entail a 10% YoY decline on following years due to possible import duty changes.

UML carries TVS in its book at LKR 632 million. We expect TVS to continue with the growth momentum supported by

the increase in per capita income and to generate a return with an average of 10% ROE for next three years. However

we believe that TVS is capable of improving its net profit margins over the time by reducing the burden on heavy

promotional expenses due to being the early stage of business cycle and improving distribution channels enabling to

cut down related operational expenses.

Shorter churning period

(approx. 6 years) of 3-

wheelers will augur well

with market growth

prospects

We estimate TVS to

generate an average 10%

ROE

TVS, the growth star

Graph 16: Market share of TVS 3-wheelers growing

UML is trading motor cycles and three wheelers along with spare parts through TVS Lanka, a joint venture between

United Motors, T.V. Sundaram Iyengar & Sons and TVS Motors of India with a 50% stake owned by UML. Starting

business in 2003, the company has been able to position itself well in a competitive market while capturing a

significant market share in both segments during last 5 years. The company strategy seems to be aligned well with

per capita income growth witnessed in the country which led to emerge a high income middle class with a strong

purchasing power of buying cycles and three wheelers.

Despite of experiencing volume dips in 2012, TVS has been able to consistently maintain its market share in two

wheeler segment above 10% while seeing a consistent growth of the market share in three wheeler segment in the

past. Despite having low net profit margins relative to the high top line of the company due to thinner gross margin

from each unit of sale, management seems to be continuously working on improving volumes via major promotions

along with a strong focus on sales and after sales channel development.

TVS has done volumes…

……...but experiences

thinner margins

25,000 35,466

15,840 18,000 21,839 24,523 32,000 25,600 20,480

0%

2%

4%

6%

8%

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16%

- 20,000 40,000 60,000 80,000

100,000 120,000 140,000 160,000 180,000 200,000 220,000 240,000 260,000

New motor cycle registrations TVS motor cycle sales Market share

Units Market share

10,381 3,656 2,761 4,028 5,320 7,000 6,650 6,318

0%

1%

2%

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5%

6%

7%

8%

-

20,000

40,000

60,000

80,000

100,000

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140,000

160,000

New 3-wheeler registrations TVS 3-wheeler sales Market share

Units Market share

11 44 124 159 149 140

0%1%2%3%4%5%6%7%8%9%10%11%12%

-

2,000

4,000

6,000

8,000

10,000

2013 2014 2015 2016(F) 2017(F) 2018(F)

Revenue PAT Net profit margin ROE

LKR Mn


Diverse product portfolio with wider brand spread

Source: Annual Reports, Dept. of Motor Trafic, LOSEC estimates

Source: UML website

Diagram 2: UML has wider product offering over sector peers

Source: Annual Reports



Apart from the pivotal role played by “Mitsubishi” in UML's brand portfolio, the company has become a home to 12

other world leading brands pertaining to motor vehicles, two wheelers and three wheelers, car care products,

lubricants and tyres. This brand composition over its peers will benefit the company from greater consumer

preference towards wider array of established brands.

Leading brands make

UML to become closer to

customers

We believe that the product diversity will enable

UML to off set losses which could be incurred on

the respective products due to unexpected fiscal

policy changes such as import duty rates.

Further, we believe that UML will continue to focus

on introducing different vehicle categories/models

such as mid-range passenger cars with auto-

transmission, commercial and special purpose

vehicles and much discussed electric vehicles in

years to come.

Diverse product portfolio

enables UML to offset

possible losses stemming

from unfavorable import

duty changes

UML markets a range of automotive products, from

top-end luxury vehicles to three-wheelers and

motorbikes, and from car parts to lubricants and

tires, thus has consistently developed its portfolio

to serve the widest possible market base across Sri

Lanka.

UML’s diverse vehicle portfolio currently offers

cars, SUVs, dual purpose vehicles, trucks, busses,

motor cycles and three-wheelers in order to

address varying customer needs of the market.

When compared with sector peers, UML stays well

ahead with the diversity and quality of their

product offering which is always backed by the

diversity of Mitsubishi Motors Japan. Therefore the

company has been able to maintain a strong

foothold amongst Sri Lankans who opt to consider

the name 'United Motors' for a purchase of brand

new commercial or personal vehicle.

Diagram 1: UML’s Product Offering

JMC Crew Cab JMC Cargo Truck JMC Full Body JMC Freezer Truck

Axia

Montero Montero Sport Outlander ASX Phev

Delica D5 DFSK 27 Brilliance H1 Brilliance H2L

Fuso Light Duty

(Canter Trucks) Fuso Medium Duty

(Canter Trucks) Fuso Heavy Duty

(Canter Trucks)

Fuso Medium Duty Fuso Heavy Duty

Lancer Ex Mirage Attrage MG

Unimo Lokka

Fuso Bus

L 200 - Single Cab

(4WD/2WD) L 200 - Double Cab

(4WD/2WD)

Sportero N300 Single Cab

(2WD)

N300 Double Cab

(2WD/4WD)

Metro 100cc Metro Plus Phoenix 125 Apache RTR 150

Scooty Pep+ Scooty Streak

Apache RTR 180

Scooty Zest Wego Jupiter XL Super

Heavy Duty

King GS King FLD King FB King MAX

CARS VANS SUVs CABS MINI TRUCKS

TRUCKS BUSSES MOTOR CYCLES

THREE WHEELERS

AGRICULTURAL

DEFENCE AND

SPECIAL

UML

DIMO

SMOT

ASHO

COLO


Strength in value chain

UML 7 13DIMO 10 32SMOT 3 4ASHO 17 10COLO 1 1AUTO 2 1

Source: Annual Reports, Company web sites Source: Annual Reports, LOSEC estimates

Graph 19: Revenue composition of lubricant and tyre products Table 03: UML's lubricants market share has improved

Sales qty (KL) Mkt share Sales qty (KL) Mkt share

Valvoline 1,077 1.98% 785 1.46%(UML)MAK 2,241 4.13% 1,760 3.28%(UML)Motul 46 0.08% 46 0.09%(AUTO)

26,753 49.30% 28,241 52.58%

Servo 6,833 12.59% 6,738 12.55%(IOC)

Source: Annual Reports, LOSEC estimates Source: Lubricant market report by PUC, Sri Lanka


Graph 18: After sales services to contribute 15-20% of

topline

Workshops

/Service

centers

Branches/S

howrooms

Dealers/Distributors/

customer contact

points/display points

Counter

>200025

2014

Caltex/

Chevron

UML has been able to consistently maintain a strong after sales service for their customers through its widely

distributed branch, showroom and dealer network which enables UML a wider reach to its existing and potential

customers. With its aggressive investment approach in upgrading and expanding workshops and showrooms, UML's

customer reach appears widely spread than most of its peers.

Spare parts & after sales services being the second highest contributor to the total revenue while retaining 10% CAGR

over last 7 years, we expect this segment to generate revenue with 15% YoY growth due to expected increase in sales

volumes along with capacity improvement of branches and workshops. We believe the investment in Rathmalana

property to set up a logistic hub and a large workshop will augur well with growing demand for after sales and spare

part services.

Being the one of few companies with a vehicle assembling licence, UML seems to have a significant strength in

assembling vehicles and marketing them through its efficient inbound and outbound dealership model. UML's fully

owned subsidiary Unimo Enterprises (UEL) is now well equipped with expertise, agreements of new principals in

place and enhanced operational capacity in order to assemble vehicles at double the capacity in coming years. Thus

we believe, UML can launch several assembled 'passenger vehicle products' in FY16 with the aim of having a fine

balance between import and assembly of different classes of vehicles in future years. We estimate these assembled

ones to capture a reasonable sales volume in next 3 years due to the attractive pricing compared with the imported

ones along with the efficient marketing and distribution model inherited with UML.

With the objective of leveraging on the customer value proposition, UML has been operating in lubricant (Valvoline

and MAK) and tyre (Yokohama) businesses while making a fair contribution to the Group's topline. UML has been the

only company amongst sector peers (excluding Autodrome) which offers lubricant products to customers and has

been able to capture a fair degree of market share.

125--

Wide customer reach to drive the business

Table 02: Better operational capability over peers

Diversification to

lubricant oil and tyre

businesses

Vehicle assembling

licence and close ties with

Chinese manufactures

will provide UML a

competitive edge

Vehicle assembling, a catalyst of changing the industry

2013Product

Relatively large number

of workshops, branches

and dealers

-

Related diversification to strengthen the value chain

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

- 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000 20,000 22,000

2009 2010 2011 2012 2013 2014 2015 2016(E)

2017(F)

2018(F)

Spare parts, repairs and services Ttl. rev excl. spare parts, repairs and services% contribution to ttl.rev YoY growth

LKR Mn

0%

5%

10%

0

100

200

300

400

500

600

700

2009 2010 2011 2012 2013 2014 2015 2016(E)

2017(F)

2018(F)

Lubricants and car care products Tyres% contribution of lubricant to ttl. rev % contribution of tyre to ttl.rev

LKR Mn


Strong balance sheet to provide convenient funding options

Graph 20: Increase in cash position and low gearing of UML Graph 21: UML could leverage on low gearing

Source: Annual reports, Bloomberg Source: Annual reports, Bloomberg

Graph 22: UML has a strong cash position and asset base over peers


Source: Annual reports, Bloomberg

Graph 23: Higher dividend payout than peers Graph 24: Above the average dividend yeild

Source: Lubricant market report by PUC, Sri Lanka Source: Bloomberg Source: Bloomberg


Strong dividend pay-outs strengthening investor confidence

UML has managed to consistently maintain a dividend payout above 25%, recording it above the peers in the last 4

years. UML has produced a steadily raising dividend payout along with strong dividend yield exceeding 6.5%

indicating stability and financial strength of the business. Company's div. yield is currently at a premium to the sector

div. yield of 3.28% and we estimate that the company would have an even better div. yield in coming years to create

value to its investors. Thus we estimate UML's dividend payout ratio to remain minimum at 40% while div. yield to

reach over 8% by FY18.

UML pays fat dividends to

investors

Near zero gearing and

strong cash position to

allow for investments

UML has been able to generate strong free cash flow balances and gearing has continued to be at near zero level

which will open up further avenues for raising debt to venture into new projects. Its cash balance (combined with

cash in hand and short-term investments) over last few years is well above most of the peers, while reaching

approximately LKR 1.36 billion by the end of June 2015. Thus UML has appeared to be a self-financed business during

previous years in relation to its local peers.

0%

1%

2%

3%

4%

5%

6%

7%

8%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

2010 2011 2012 2013 2014 2015 2016E 2017F 2018F

Total equity Cash and cash equivalents

Total assets(LSH) Gearing (RHS)

LKR Mn

-

5,000

10,000

15,000

20,000

0

200

400

600

800

1,000

1,200

1,400

1,600

UML DIMO ASHO COLO SMOT AUTO

Cash and cash equivalents Total assets

LKR Mn LKR Mn

0%

7%

0%1%

0% 0%0%

19%

0% 0% 0% 0%0%

13%

0%

2%

6%

0%

0%

5%

10%

15%

20%

UML DIMO ASHO COLO SMOT AUTO

2013 2014 2015

0%5%

10%15%20%25%30%35%40%45%50%55%60%65%

2010 2011 2012 2013 2014 2015

UML DIMO COLO ASHO

SMOT AUTO

0%

2%

4%

6%

8%

10%

12%

0

1

2

3

4

5

6

7

8

9

2010 2011 2012 2013 2014 2015

Dividend per share Dividend yield

LKR


Flexible on changes in macro economic variables


Source: Bloomberg Source: Bloomberg


Graph 27: UML will benefit on declining lending rates

Source: Bloomberg


Steady decline in interest rates backed by policy interest rate cuts and significant liquidity in the money market has

enhanced the affordability of vehicles including UML products in recent years. Therefore if interest rates continue to

remain low, people will continue to have cheaper financial products such as vehicle leases, loans and hire purchases

while benefiting UML in coming years.

CBSL has also indicated on keeping the interest rates low despite of Rupee devaluation, however we presume that the

currency devaluation is likely to create an upward pressure on interest rates in the near future. Adding fuel to the

fire was CBSL's directive to commercial and licensed specialized banks to reduce Loan to Value (LTV) to 70% in order

to discourage vehicle purchases on leases and thereby controlling vehicle import volumes and thus curtailing BoP

deficit. The directive is likely to hit the motor sector growth prospects in the future and therefore we have followed a

modest approach in estimating sales volumes of economic passenger vehicles and commercial vehicles.

Depreciation of CNY and

MYR to offset Rupee

devaluation

Vehicle loans and leasing

to be cheaper under low

interest rates

UML to leverage on low interest rate environment

Confronting FOREX risk as experienced industry player

UML appears to be exposed to considerable forex risk since its product portfolio is mainly consisting of vehicles with

Japanese, Chinese and Malaysian origin. From latter part of 2014, LKR has depreciated over Yen and Dollars making

Japanese vehicles relatively expensive than before. Specially with CBSL allowing Rupee to be freely floated since early

September 2015, Rupee saw a significant value depreciation against USD which will essentially lead prices of

imported vehicles and spare parts to go up in the near future. As a result, although UML is mostly likely to pass this

additional cost to the customers to maintain its target margins, company will find difficult to achieve anticipated sales

volume due to lowering demand on increased vehicle prices.

However, Chinese currency devaluation in August in this year along with depreciation of Malaysian Ringgit will make

vehicle and spare part imports from these countries relatively cheaper than before. But UML continues to remain

unhedged against currency fluctuations creating considerable risk despite diverse portfolio.

Graph 25: LKR depreciating against USD and JPY making

imports expensive

Graph 26: Yuan and Ringgit depreciating against USD

making Chinese and Malaysian imports cheaper

Imported vehicle prices

to rise up with rupee

devaluation, impacting

UML earnings

4

5

6

7

8

9

10

11

12

13

14

15

16

1/1/2010 7/1/2010 1/1/2011 7/1/2011 1/1/2012 7/1/2012 1/1/2013 7/1/2013 1/1/2014 7/1/2014 1/1/2015 7/1/2015

%

12M T-Bill rate Weekly AWPLR

0.90

1.00

1.10

1.20

1.30

1.40

1.50

1.60

122

124

126

128

130

132

134

136

138

140

1/1

/20

14

2/1

/20

14

3/1

/20

14

4/1

/20

14

5/1

/20

14

6/1

/20

14

7/1

/20

14

8/1

/20

14

9/1

/20

14

10

/1/2

01

4

11

/1/2

01

4

12

/1/2

01

4

1/1

/20

15

2/1

/20

15

3/1

/20

15

4/1

/20

15

5/1

/20

15

6/1

/20

15

7/1

/20

15

8/1

/20

15

9/1

/20

15

USD-LKR JPY-LKR

LKR LKR

2.502.702.903.103.303.503.703.904.104.304.50

6.00

6.05

6.10

6.15

6.20

6.25

6.30

6.35

6.40

6.45

USD-CNY USD-MYR

CNY MYR

AWPLR declines and stabilizing at 6-7%


Table 04: Valuation Sensitivity Matrix

13% 14% 15% 16% 17%1% 158.20 144.40 130.80 122.60 113.802% 167.70 152.10 136.90 127.90 118.203% 179.10 161.20 144.00 133.90 123.204% 193.00 172.20 152.40 141.00 129.005% 210.50 185.50 162.40 149.30 135.80

Source:CSE, Bloomberg, LOSEC estimates

Table 05: Peer Comparison

Name PE (x) PBV (X) ROE %

United Motors Lanka Plc (Sri Lanka) 70 6.94 0.92 4.09 14.91Diesel & Motor Engineering (Sri Lanka) 44 7.82 0.67 2.90 9.26Colonial Motors Plc (Sri Lanka) 13 6.70 0.48 4.96 7.50Sathosa Motors Plc (Sri Lanka) 13 6.29 1.40 2.34 24.73Lanka Ashok Leyland Plc (Sri Lanka) 38 16.28 1.97 2.68 12.82Sunfonda Group Holdings Ltd (China) 197 6.51 0.79 2.48 13.22Berjaya Auto Bhd (Malaysia) 494 10.19 4.59 5.09 51.96Baoxin Auto Group Ltd (China) 1089 12.30 1.28 1.52 10.89


11 | LOLC Securities Limited 12| LOLC Securities Limited

Valuation

We have used the Free Cash Flow to Equity (FCFE) model in deriving the valuation for UML. Accordingly we estimate

total valuation for the company at LKR 14.52 billion. We assume a cost of equity of 15% which is 7% premium to 3

year Sri Lanka Govt Treasury Bond Yield. A risk premium of 7% has been taken considering the equity market risk in

CSE as well as sector volatilities. We have taken a mid-term growth (3-6 years) of 5% considering the expected GDP

growth of the country and a free cash flow terminal growth (>6 years) of 3%. Accordingly, we value the share at LKR

144 which is a 47% discount to the current price of the share. At the current share price, UML is trading at forward

PE of 6.95X and a forward PBV of 0.95X.

Sensitivity of valuation for Terminal Growth and Cost of Equity is indicated below and sensitivity of key assumptions

are evaluated separately in proceeding section.

Cost of EquityShare price in LKR

Ter

min

al

Gro

wth

Rat

e

Market Cap (USD Mn) Dividend

Yield %


Summarized Sensitivity of Assumptions

Graph 28: GDP growth sensitivity: High Graph 29: Currency sensitivity: Medium

Source:LOSEC Research Source:LOSEC Research

Graph 30: Tax rate: Medium Graph 31: Interest rate sensitivity: Medium

Source:LOSEC Research Source:LOSEC Research


12| LOLC Securities Limited 13 | LOLC Securities Limited

Earnings Risk Comment

UML’s valuation is dependent on the overall economic growth of the country and resulted increase in demand for

motor vehicles. Thus any broader economic slowdown leading to decline in GDP growth and GDP per capita income,

interest rate rises and rupee depreciation will dampen the expected value of UML.

Our investment case is evolved around the presumption of fast economic growth of the Island nation and resultant

increased consumption. But change of economic outlook to a stagnant environment can lead to people opt for basic

transportation rather than owning personal vehicles. Furthermore, change in lifestyles such as improved public

transport facilities can curtail demand for new vehicle imports.

In the short term, motor sector is highly sensitive to frequent vehicle import duty changes. Govt takes import duty as

an instrument to control the vehicle imports and thereby controlling the impact on the balance of payment. However,

we believe that UML is now well experienced and shaped in tackling these cyclical import duty changes and we

believe that the company is equipped and capable of rapidly introducing suitable vehicles which can exploit price

benefits emerging from continuous structural changes of import duties.

UML is heavily dependent on Mitsubishi brand due to its reputation in the local market while Mitsubishi vehicles and

spare parts account nearly 70% of UML's topline. Mitsubishi corporation is in existence in the global automotive

industry over a century and has built up its fame as a quality, reliable and affordable vehicle manufacturer. Therefore

in a scenario where the Mitsubishi Corporation to face a crisis or a significant reputational damage to the brand in the

global context, UML earnings could be affected substantially. However with the present global footprint of Mitsubishi,

we will not foresee such incident to occur in the short to medium term.

138

139

140

141

142

143

144

145

146

147

148

-1% 0% 1%Interest rate forecast

LKR

2%

-2%

138

139

140

141

142

143

144

145

146

147

148

-1% 0 1%Change of tax rate forecast

LKR

2%

-2%

100

105

110

115

120

125

130

135

140

145

150

155

160

-1% 0 1%Change of GDP growth forecast

LKR

-8%

8%

138

139

140

141

142

143

144

145

146

147

-1% 0 1%USD:LKR forecast

LKR

1.5%

-1.5%


Appendices

Table 06: Return comparison

3 months -2.69 0.85 -2.10 2.916 months 8.67 2.38 -1.91 11.08YTD -5.60 -2.99 -6.43 10.031 year -3.07 -2.92 -5.88 2.43

Source:CSE, Bloomberg

Graph 32: Share Price Movement

Source:CSE, Bloomberg

Graph 33: PE Chart Graph 34: PBV Chart

Source:CSE, Bloomberg Source:CSE, Bloomberg




S&P SL 20

IndexDIMO

Graph 35: Price per Sales Graph 36: Dividend Yield

Graph 37: CSE PE Chart Graph 38: CSE PBV Chart

ASI Index% UML

50

70

90

110

130

-

1,000,000

2,000,000

3,000,000

4,000,000

5,000,000

6,000,000

Rs

Vo

lum

e

Volume Price

SMAVG (50) SMAVG (100)Highest Price at 01.24.2011: LKR 128.005Year Lowest Price as at 07.11.2012: LKR 43.40

0.0025.0050.0075.00

100.00

9/10/12 3/10/13 9/10/13 3/10/14 9/10/14 3/10/15 9/10/15

RSI (14)

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15

PE ratio Highest Average Lowest

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

09/11/12 03/11/13 09/11/13 03/11/14 09/11/14 03/11/15 09/11/15

PBV ratio Highest Average Lowest

0.00

0.20

0.40

0.60

0.80

1.00

1.20

10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15

Price to Sales ratio Highest Average Lowest

8.00

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

10/01/12 04/01/13 10/01/13 04/01/14 10/01/14 04/01/15

ASI PE ratio Highest Average Lowest

1.00

1.20

1.40

1.60

1.80

2.00

10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15

ASI PBV ratio Highest Average Lowest

0

2

4

6

8

10

12

14

16

10/1/12 4/1/13 10/1/13 4/1/14 10/1/14 4/1/15 10/1/15

UML dividend yield Highest Average Lowest


Table 07: Financial Summary ForecastFigures in LKR Mn (31st March) FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F)Income StatementRevenue 17,777 11,041 10,538 14,835 17,950 19,958

Cost of Revenue -13,513 -7,639 -7,811 -10,829 -12,924 -13,971

Gross Profit 4,264 3,402 2,727 4,005 5,026 5,987

Operating Expenses -1,653 -1,504 -1,568 -2,249 -2,685 -2,966

Operating Income 2,698 1,930 1,251 1,821 2,407 3,087

Share of profit of equity accounted invt 0 20 63 79 74 70

Pretax Income 2,713 2,174 1,626 2,086 2,701 3,450

Income Tax Expense -706 -567 -364 -467 -611 -786

Net Profit att. to shareholders 2,014 1,608 1,263 1,619 2,090 2,664

Balance Sheet Cash & Near Cash Items 1,349 911 1,619 1,996 2,334 3,213

Accounts & Notes Receivable 1,164 1,438 1,699 2,386 2,894 3,218

Inventories 2,621 3,324 3,934 4,438 5,311 5,741

Total Current Assets 5,143 5,685 7,281 8,849 10,568 12,201

Total Long-Term Assets 4,073 4,392 5,868 6,054 6,239 6,422

Total Assets 9,216 10,077 13,149 14,903 16,807 18,623

Accounts Payable 745 775 1,213 1,677 2,007 2,169

Other Short-Term Liabilities 952 1,030 1,319 1,619 1,919 2,219

Total Current Liabilities 1,696 1,806 2,532 3,296 3,926 4,389

Total Long-Term Liabilities 149 174 181 199 219 241

Total Liabilities 1,845 1,980 2,714 3,496 4,145 4,630

Share Capital 336 336 336 336 336 336

Retained Earnings & Other Equity 7,034 7,761 10,099 11,071 12,325 13,657

Total Equity 7,371 8,097 10,436 11,407 12,661 13,993

Total Liabilities & Equity 9,216 10,077 13,149 14,903 16,807 18,623

Cash Flow Statement Net Income 2,013 1,608 1,262 1,619 2,090 2,664

Depreciation & Amortization 93 134 138 139 141 143

Changes in Non-Cash Capital 1,248 -923 -428 -726 -1,052 -591

Cash From Operations 3,025 527 596 1,032 1,179 2,215

Capital Expenditures -226 -873 0 -200 -200 -200

Increase in Investments -734 -492 -935 -187 -205 -226

Cash From Investing Activities -911 -1,041 -287 -466 -480 -496

Dividends Paid -605 -874 -605 -648 -836 -1,332

Change in Long Term Borrowings -617 213 351 0 0 0

Cash from Financing Activities -1,223 -662 -255 -330 -516 -1,010

Net Changes in Cash 892 -1,176 55 237 183 709




Table 08: Forecast Ratios FY 13 FY 14 FY 15 FY 16 (E) FY 17 (F) FY 18 (F)

Profitability Ratios

GP Margin (%) 24% 31% 26% 27% 28% 30%

NP Margin (%) 11% 15% 12% 11% 12% 13%

ROE (%) 27% 20% 12% 14% 17% 19%

ROA (%) 22% 16% 10% 11% 12% 14%

Earnings per share (LKR) 19.95 15.93 12.51 16.05 20.72 26.40

Dividend per Share (LKR) 6.67 8.00 6.00 6.42 8.29 13.20

Credit Ratios

Total Debt/Equity Ratio (%) 8% 11% 12% 13% 14% 15%

Interest Coverage (X) 24.12 28.90 15.19 21.29 23.08 25.09

Total Assets/Equity (X) 1.25 1.24 1.26 1.31 1.33 1.33

Net Debt/EBIT (X) -0.29 0.36 0.80 0.58 0.49 0.25

Liquidity Ratios

Current Ratio (X) 3.03 3.15 2.88 2.68 2.69 2.78

Quick Ratio (X) 1.49 1.31 1.32 1.34 1.34 1.47

Asset Turnover Ratio (X) 1.93 1.10 0.80 1.00 1.07 1.07

Net Asset Value per share (LKR) 73.05 80.25 103.42 113.05 125.48 138.68

Growth Ratios

Revenue Growth YOY% -15% -38% -5% 41% 21% 11%

Earnings growth YOY% -12% -20% -21% 28% 29% 27%

Total Assets YOY% -12% 9% 30% 13% 13% 11%

Total Debt YOY% -67% 61% 34% 25% 20% 16%

Investment Ratios

PE Ratio (X) 3.21 5.15 7.04 8.97 6.95 5.45

Price to Book Value (X) 0.88 1.02 0.85 1.27 1.15 1.04

Dividend Yield (%) 10.42% 9.76% 6.81% 4.46% 5.76% 9.17%







Joint Venture

TVS is a joint venture between UML and T.V Sundaram Iyengar & Sons Limited and TVS Motors of India. The company

is specialized in motor cycles, scooters, three wheelers and spare parts. TVS has built an extensive network of

distributors and dealers with 205 service points and 160 dealers for sales. TVS two wheeler portfolio includes cycles

with the engine capacity of 100/110/125/150/180 cc coupled with scooters and mopeds. TVS three wheeler

portfolio consists of locally modified three wheelers under the brand 'TVS King'. This is the first ever three wheeler

to be fitted with a 200 cc four stroke engine and it has been very well accepted in every part of the country for its

performance and fuel efficiency.

TVS Automotives Pvt. Ltd. is a fully owned subsidiary of TVS Lanka Pvt. Ltd. which markets automotive lubricants &

Tyres. It is the agents for Bharat Petroleum Lubricants in Sri Lanka and supplies automotive lubricants under the

brand of 'MAK Lubricants'.

Company

United Motors Lanka PLC (UML) is a licenced vehicle importer and distributor in Sri Lanka. It is the sole agent for

Mitsubishi vehicles in the country. Apart from its main business of importing and selling automobiles, UML is engaged

with vehicle repairing, spare part sales and after sale services, sale of car care and lubricant products and tyre sales.

The brands marketed by United Motors and its subsidiaries and associates include Mitsubishi passenger and Fuso

commercial vehicles from Japan, TVS two and three wheelers from India, Perodua compact cars from Malaysia, JMC

commercial vehicles, DFSK Mini trucks, Yokohama tyres from Japan, JK tyres and Mak lubricants from India and

Valvoline lubricants and Eagle One car care products from USA. The United Motors has 9 branches strategically

located across the island which offer sales of vehicles and genuine parts as well as workshop services. The UML group

has over 2,000 dealers island-wide for the distribution of tyres, lubricants, two wheelers and three wheelers, with

representation in both urban and rural areas.

Unimo Enterprises imports and distributes Perodua cars, Morris Garages (MG cars), JMC cabs, DFSK vans, Yokohama

tyres and assembly of DFSK vans. The company’s branch network is strategically located in Anuradapura, Kandy,

Kurunegala, Matara, Nugegoda, Nuwara Eliya, Ratnapura, Kelaniya and Jaffna while its Yokohama tyre operation

distributes its range of products through thirty key dealers located around the island.

Orient Motor Company imports and retails small commercial vehicles under the brand DFSK 'Unimo Lokka'. This

Chinese truck has been specifically designed for the Sri Lankan terrain and is supported by higher road bearing

capacity and more sophisticated features than rivals. Since the introduction of this truck in 2011, 4000 units have

been sold while capturing 10% market share.

Unimo Enterprises Ltd.

Orient Motor Company Ltd.

TVS Lanka Pvt. Ltd.

TVS Automotives Pvt. Ltd

Group Structure

Subsidiaries

United Motors Lanka PLC(UML)

Unimo Enterprises Ltd(100%)

Orient Motor Company Ltd (100%)

UML Property Developments Ltd (100%)

TVS Lanka Pvt. Ltd(50%)

TVS Automotives Pvt. Ltd (100%)


UML Shareholding Distribution (as at 30. 06.2015)

Shareholder % Stake

Mr. M.A. Yaseen 61.20%Ms. R.R Yaseen 10.67%Mrs. S,M. Chrysostom 6.88%Mitsubishi Motor Corporation 4.89%Mr. C. Yatawara 1.22%Mr. H.A Van Starrex 0.68%Capital Development & Invetsment Company PLC 0.60%Bank of Ceylon 0.34%Mr. A.M Weerasinghe 0.30%Deutsche Bank AG Singapore branch 0.25%Mr. S.D. Yaseen 0.24%Eagle Growth Fund 0.22%Mrs. S.T. Xavier 0.20%Hatton National Bank (Trading portfolio) 0.19%Waldock Mackenzie Ltd/Hi-Line Trading (pvt) Ltd. 0.16%Mr. J.A Yaseen 0.15%Mr. P. Rathnayake 0.15%Mrs. J.D De Silva Sugathapala 0.15%Ms. R. Suhayd 0.15%Mercantile Investment and Finance PLC 0.15%Others 11.33%Total

Source: Annual Report FY14/15 Source: Annual Report FY14/15

Source: Annual Report FY14/15


301,880

Although a single party exists with a controlling stake of 70%, we believe that the Board has the flexibility to drive the

company’s strategy to optimize the stakeholder expectations including minority shareholders mainly due to its sound

corporate governance structure along with unambiguous business operating model. The management is also of the

view that major shareholders’ influence on company management is at a very minimum level where all the strategic

business decisions are made by qualified and experienced business professionals. Given its good corporate

governance and sound performance, UML has been recognized amongst the top 100 of the most respected entities in

Sri Lanka, which will essentially help to improve investor confidence on the company.

Corporate governance structure

No. of shares

151,000 150,000

100,900,626 11,427,419

Apart from 'CEO', 'Finance Director' and 'Director-after sales services' along with 'one non-independent director', the

Board of UML is consisting of 5 Non-Executive Independent Directors. There is also a representative from Mitsubishi

Motor Corporation, Japan in the Board as a non-executive independent director which leads UML’s Board to make

decisions under the close scrutiny of a reputed multinational corporate. Upon analyzing UML’s historical financial

information, it is evident that related party transactions have been recorded relatively in less numbers and disclosed

in a transparent and explicit manner.

1,231,800 690,353 604,209 351,182

201,085 187,643 165,354 156,177 156,000 151,433

Graph 40: Shareholder structure 2 (as at 31.03.2015)

Graph 41: Composition of EDs and NEDs

Graph 39: Shareholder structure 1 (as at 31.03.2015)

61,750,266 10,767,210

6,945,471 4,937,142

256,527 243,300 225,175

33%

56%

11%Exe. directors

Non exe. independent directors

Non exe. non independentdirectors

Resident48%Non-Resident

52% Individuals77%

Institutional23%


Key Management (Source: Company Annual Report 2014/15)

Sunil G. Wijesinghe / Chairman - Non Executive Director (Independent)

Chanaka Yatawara / Group Chief Executive Officer - Executive Director

Aashiq Lafir / Executive Director (Finance)

Ramesh Yaseen / Executive Director (After Sales Services)

Ananda Atukorala / Non Executive Director (Independent)Source: Annual Report FY14/15

Masafumi Sadawa / Non Executive Director (Independent)

Source: Annual Report FY14/15


Ananda Atukorala serves as an Independent Non-Executive Director of Orient Finance PLC, Bartleet Finance PLC, UB

Finance Ltd., Pragnya Tech Parks Lanka (Pvt) Ltd., Arni Holdings and Investments (Pvt) Ltd., Unawatuna Boutique

Resort (Pvt) Ltd., Unimo Enterprises Ltd., TVS Lanka (Pvt) Ltd. and Credence Genomics Private Ltd.

Masafumi Sawada is the General Manager of Asia & ASEAN A Department, Mitsubishi Motors Corporation, Japan

Sunil Wijesinha is the Chairman of Watawala Plantations PLC, Unimo Enterprises Ltd., Orient Motor Company Ltd.,

UML Property Developments Ltd. and TVS Automotives (Pvt) Ltd. Mr. Wijesinha is also a Director of BizEx Consulting

(Pvt) Ltd., Siyapatha Finance PLC, National Institute of Business Management and TVS Lanka (Pvt) Ltd. He was the

former Chairman of NDB Bank PLC, Merchant Credit Ltd and Employees’ Trust Fund Board. He was the former

President of Japan Sri Lanka Technical and Cultural Association (JASTECA), Immediate Past Chairman of Employers’

Federation of Ceylon and immediate past President of the National Chamber of Commerce of Sri Lanka. He is a Fellow

of Chartered Institute of Management Accountants (UK).

The company was founded in 1945 as a Private Liability Company. In 1972, it was vested with the government and

carried out operations as the Government Owned Business Undertaking of United Motors. In 1985, the Company

entered into a distributor agreement with Mitsubishi Motors Corporation, Japan and has since then been the sole

distributor for brand new Mitsubishi vehicles in Sri Lanka. In 1989 the Company was selected as the first

Government venture for ‘Peoplisation’ with the intention of broadening its ownership amongst the public. In May

1989, the Company was renamed as United Motors Lanka Limited and incorporated as a Public Limited Liability

Company with an authorized share capital of Rs.100,000,000.

In 1994, the company incorporated of a subsidiary - UML Property Development Ltd.. By 2002, Unimo Enterprise Ltd.

was acquired by UML and during 2003, 50% interest in TVS Lanka (pvt.) Ltd. was acquired. During 2007, the

Company was reregistered under the new Companies Act No. 07 of 2007 as United Motors Lanka PLC. In December

2010, the company increased the number of shares by way of a share split on the basis of two new ordinary shares

for every existing issued ordinary share.

Mr. Chanaka Yatawara is a Director of Unimo Enterprises Ltd., Orient Motor Company Ltd., UML Property

Developments Ltd., TVS Lanka (Pvt) Ltd. and TVS Automotives (Pvt) Ltd. He holds a degree in Business

Administration - Economic from the Lewis & Clark College, Oregon, USA.

Lafir has over 25 years of senior management experience in diverse business activities. He is also a Director of Skills

International (Pvt) Ltd. He is a Fellow of the Chartered Institute of Management Accountants (CIMA-UK) and an

Associate Member of the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka). He also holds a Masters

Degree in Business Administration from the Post Graduate Institute of Management of the University of Sri

Jayawardenapura

Ramesh Yaseen is a Director of Unimo Enterprises Limited. He was a former Director of Readywear Industries

Limited.

History


Motor Sector in Sri Lanka

United Motors 106 10,695 1262.33 84.34 11.0 7.7 7.5 1.3 6.81DIMO 690 6,125 596.08 1046.50 9.3 4.6 7.7 0.7 3.17C M Holdings 137 2,025 283.99 250.18 7.5 5.8 7.4 0.5 4.80Ashok Layland 1,450 5,250 331.70 758.11 12.8 7.4 15.8 1.9 3.08Sathosa Motors 300 1,810 261.33 214.46 24.7 12.4 6.3 1.4 -Autodrome 850 1,020 38.27 824.22 4.8 4.2 21.9 1.0 0.8

Source: Bloomberg

Indicator Value

PER 8.36PBV 1.18Dividend Yield 3.28%

Source: LOSEC estimates Source: Bloomberg


Motor sector in Sri Lanka consists of 6 listed companies (UML, DIMO, ASHO, COLO, SMOT, AUTO)and unlisted

companies such as Toyota Lanka, Associated Motorways Pvt. Ltd, Stanford Motors, Ishara Traders, Indra Traders, etc.

In addition to that there are various institutional and individual vehicle importers who import and sell brand new and

used vehicles originated from different countries, mainly from Japan, India, South Korea, Europe and China. Although

primary business in this sector being the importation and distribution of motor vehicles, most of these companies

have also been engaging with industry related other businesses including repairs and after sale services, spare-part

sales, lubricant and car care products, tyre importing/manufacturing and vehicle assembling. The sector currently

demonstrates a growing tendency towards assembling vehicles within the country in order to cater to local vehicle

demand.

PER PBV Dividend

Yield %

Y/E Net

Profit(LKRMn)

NAV(LKR per

Share)

ROE%

*Company overview, Group structure, UML shareholding distribution, Composition of Eds and NEDs, Key management, History, SWOT analysis,Industry analysis are taken from the extracts of websites, Annual reports,

Bloomberg and LOSEC research materials.

ROA%

Progression made in the road infrastructure development through improved accessibility and connectivity has shown

a positive contribution to the motor sector. Road development was lackluster in last few decades due to the war has

been given prominence by the governments which were in power time to time. However with the closure of these

ethnic conflicts in 2009, transportation infrastructure achieved a remarkable growth during last couple of years. Poor

public transportation system in Sri Lanka also plays considerable role in uplifting demand for private motor vehicles.

Although public passenger transportation showed some progress in recent times, it is not sufficient to attract

commuters who use private modes of transportation at a significantly higher cost. According to the Urban Transport

Master Plan developed by Japan International Corporation (JICA), demand for private motor vehicles are expected to

grow while share of public transportation is expected to decrease from 58% in 2013 to 41% in 2035.

Counter

Table 09: Financial performance comparison of peers

Table 10: Selected motor sector indicators Graph 42: Earnings comparison of peers

Total vehicle population of the country accounts for approximately 5.6 million vehicles while 314,155 new vehicles

have been registered for the first half of 2015. Amongst listed companies in the sector, UML accounts for the highest

market cap which is LKR 10,695 million while the market cap of the sector reaches to be LKR 27.2 billion. These listed

players have grown rapidly in last few years with the increased demand for vehicles and other related products/

services. However, the listed companies encounter a severe competition from non-listed vehicle importers since the

demand for used vehicles over brand new ones due to unbalanced pricing and substantial brand preference for

'Toyota'.

In recent times, Sri Lankan motor sector has become highly sensitive to frequent import duty changes and fuel price

fluctuations. However, despite these uncertainties, the sector has been growing at a rapid phase in the last decade

mainly due to increasing the disposal income of general public and prices of vehicles specially motor cycles, three

wheelers and passenger cars becoming relatively cheaper and affordable for low and middle income people.

A summarized snapshot of the performance and investor ratios of six listed companies in the motor sector is as

follows:

Price(LKR

per Share)

Market Cap

(LKR Mn)

0

500

1000

1500

2000

2500

2013 2014 2015

UML DIMO COLO ASHO SMOT AUTO

LKR Mn


SWOT Analysis

Strengths

- Strong brand name of United Motors with 70 years in business- Sole agent for Mitsubishi motor vehicles along with strong brand image of Mitsubishi in the globe- Experienced and qualified Board of Directors- Diverse product portfolio with wider brand spread- Island wide branch and dealer network to deliver the products- Strong balance sheet, sound cash base and near zero debt position enabling convenient access for funding- Gvt. approval to assemble vehicles locally

- Increasing per capita income along with the consumption growth will create a demand for UML's products- Prevailing low interest rate environment will make vehicle leasing products cheaper

- Growing demand for fuel efficient vehicles (ex:electric, hybrid, plug-in-hybrid electric)

- Frequent changes of import duties, exchange rates and interest rates- Oil price fluctuations- Heavy competition stemming from other global brands (ex:Toyota, Honda)

- Frequent changes in technology- Reduction and implementing a cap of Loan to Value (LTV) ratio by CBSL

Bargaining power of customers

Threat of substitutes

Threat of new entrants

Existing Rivalry


Weaknesses

Threat of new entrants is low due to high capital requirements to enter to the industry. Very few players including

UML are capable of setting up island-wide showrooms, distribution net work and assembly facilities through

significant capital infusion.

Public transportation can be considered as the main substitute for motor vehicle industry. Since Sri Lanka does not

have strong public transportation system, demand for private motor vehicles are considered to be high. Thus threat of

substitute towards the industry is relatively low.

UML customers will be the general public, private corporates and state enterprises. Since the industry is concentrated

with many institutional players and individual importers, customers have relatively high bargaining power in

choosing vehicles from various models. However, if the customer is selective for a particular brand like Mitsubishi

then their power on bargaining could be relatively less (medium), as they have to rely on UML.

UML has a high reliance on Mitsubishi Motor Corporation as its main products are Mitsubishi vehicles. Thus

Mitsubishi retains a high bargaining power over UML in deciding prices and importing quantities.

Rivalry amongst existing listed and non listed companies in this sector is high, because customers have wider

product/brand base for their selection.

- Heavy dependent on principles' production volumes and allocations (ex. Production halt of Perodua Elite by the

manufacturer and delaying to introduce a replacement to the market leading UML to miss the opportunity of import

duty reductions on small vehicles)

- Significant demand for used vehicles over brand new vehicles and many institutional and individual players dealing

with used vehicles imports

Threats

Bargaining power of suppliers

Industry Analysis

- Poor public transportation and low vehicle penetration compared with other countries in the region will create

demand for private motor vehicles

Opportunities


Recommendation Guidance

BUY – expected return > 10% in excess of benchmark return

SELL – expected return less than benchmark return

HOLD – expected return between 0% and 10% in excess of benchmark return

Investment Horizon: 3 years

Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly

Medium: Maximum price volatility to be up or down between 25% - 50% monthly.

Low: Maximum price volatility to be up or down less than 25% monthly.

Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary

EPS = Earnings per Share

ROA = Return on Assets (adjusted net profit/average total assets)

ROE = Return on Equity (adjusted net profit/average total equity)

CAGR = Compound Annual Growth Rate ((End Value/Start Value) ̂(1/number of years) -1)

GP= Gross Profit

EBITDA= Earnings before interest, tax, depreciation and amortization

PBT= Profit before tax

PAT= Profit after tax

NP= Net Profit

PBV= Price to book value ratio

PE= Price to earnings ratio


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be directly or indirectly related to specific inclusion of specific recommendation or views in this research. On a general basis analyst’s performance appraisal may be influenced by

quality of the content and efficacy of the research. The analyst(s) who is/are responsible for compiling or co-compiling this research and whose names appear as the analyst(s)

receive compensation based on overall revenues of LOLC Securities Limited and its holding company (Lanka ORIX Company PLC – LOLC Group), which may include brokerage

revenue from transactions involved with the securities mentioned in this research.

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