THE COMPANY: GB Auto is a leading automotive player in the Middle East and North Africa. It is the sole assembler and distributor of Hyundai passenger cars and the exclusive Mazda passenger car distributor in Egypt with a market share of 30%, the highest among industry players. Through a 50-50 joint venture (JV), the company also imports and distributes Hyundai PCs in northern Iraq. The passenger car segment is the largest contributor to GB Auto’s top line, making up 75% of its consolidated revenue in 2011. The company is also the exclusive agent for Bajaj two- and three-wheelers; this segment has grown to become its second largest business segment (13% of 2011 consolidated revenue).
GB Auto’s commercial vehicle (CV) operation (4% of 2011 consolidated revenue) assembles and distributes Volvo and Mitsubishi buses and trucks, manufactures trailers for sale in Egypt and export to Algeria, and sells construction equipment under the Volvo brand. GB Auto sells tires under the Turkish Lassa and Japanese Yokohama brands. It also provides financial leasing, microfinance, and consumer finance via three of its subsidiaries, with revenue from that segment almost quadrupling since 2008. The company operates Egypt’s largest after-sale service network, with the model’s success currently being emulated at the Iraqi JV to capitalize on the segment’s high margins.
Despite local political unrest in 2011, GB Auto’s top line grew 8% year-on-year (y-o-y) to LE7.4bn ($1.24bn). This was fuelled largely by passenger car market share gains (32% in 2011 versus a five-year average market share of 27%), aided by new model launches (39% of 2011 Hyundai sales volume). Record three-wheeler sales also helped, as demand remained resilient given their unique buyer profile: relatively low -income earners who rely on three -wheelers to make a living. Although the company’s consolidated gross margin dropped 100 bps to 11.9% in 2011 on overhead under-recovery at the after-sale segment and losses at the CV division, GB Auto’s strategy to price for margins at the passenger car segment bore fruit, with management able to pass all currency-related cost increases (as the result of the Egyptian pound’s depreciation) on to consumers. For its part, the Iraqi JV’s performance remains haunted by supply shortages from Hyundai Motor Company, though some volumes are being redirected from Syria amid turmoil there. The stock is trading at a 2011 P/E of 13.5x and a dividend yield of 5%.
DEVELOPMENT STRATEGY: A number of new venture roll-outs in 2012 should further strengthen GB Auto’s standing in Egypt’s and Iraq’s undermotorised markets. The firm sealed an agreement to assemble and distribute China’s Geely passenger cars beginning 3Q 2012 in Egypt and later in other North African countries where it aims to prioritise. The new deal will expand GB Auto’s passenger car offering to a lower income bracket and utilise the 80,000-unit assembly capacity that will be vacated when the Hyundai Verna – GB Auto’s best-selling model – is discontinued at the end of 2013. With the addition of the Geely brand, GB Auto aims to maintain a market share above 30% going forward.
Additionally, GB Auto plans to add new representations to its offerings in light CVs (pickup trucks and microbuses) to fill in the missing links in its current CV offering. These agreements would extend beyond Egypt to other high-potential North African markets as well. The company is also finalising possible partnerships in the construction equipment, agricultural equipment, and tyre segments, among others.
The company plans to launch its new consumer finance arm, Drive, by early 3Q 2012. The venture is set to be instrumental in mobilising passenger car sales to GB Auto’s clients, in addition to enhancing growth at its aggressively expanding financing business segment.
GB Auto intends to double the capacity of its after-sale service centres in 2012 through the opening of three new after-sale facilities, including a sales, service, and spare parts facility – its largest to date – which opened in May 2012 and is located on the Cairo-Ismailia Desert Road. The division is also proceeding to open new service centres in Alexandria and Suez in 2013.
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