1 March 2017

Honda Atlas Cars Pakistan Limited

Interesting times are ahead for the auto industry and for the three Japanese carmakers in
Pakistan, for better or for worse. Smaller of the three carmakers, today Honda is a glowing
example. The company has moved up slowly utilizing only half of its existing capacity but its
share in the car market has increased, reached 20 percent in 2014 from 9 percent when it first
starting selling cars in the country.

The outgoing fiscal and the ongoing one may prove to be the time when Honda starts to outshine
the rest. Its stock has tripled in the past year alone. The market is receptive to the company's
model upgrade of its Civic, and introduction of new model. Combined sales in latest numbers-for
7MFY17-show a 51 percent year-on-year growth in sales while January 2017 saw the highest
sales the company has sold in a month to date.

Could Honda be writing a growth story; and what does the future hold? Let's look briefly.

Brief history

Honda Atlas Cars Pakistan Limited (PSX: HCAR) is a joint venture between Honda Motor
Company Limited Japan, and the Atlas Group of Companies, Pakistan. The company was
incorporated in 1992 and the joint venture agreement was signed the next year. The company
rolled out its first assembly line in 1994. The company has expanded its dealership network from
six to a network of 21 (3S-sales, service and spare parts), 18 (2S- service and spare parts) and 5
(1S- spare parts) authorized dealerships across the country.

Shareholdings

The company is jointly owned by Honda Motor Company and the Shirazi group. As at March
2016, 51 percent of the company's shares were held by the former while 23 percent were held by
Shirazi Capital and 7 percent by Shirazi Investments. Also, 7 percent of the shares are held by
the public.
Operational and Financial performance

With a capacity to produce 50,000 units (in double-shift), production has remained less than 60
percent of the capacity but soon this could change. The company launched a new civic just last
year, as well CBU units of Honda Accord, CRV and the new HR-V, a miniSUV which is a first in
Pakistan. City may be up for a facelift soon too.

Sales numbers have climbed from 18,000 units in 2007 to almost 26,000 units in 2016 for the
year ending March 2016; while revenues have grown from Rs 17 billion to Rs 40 billion; an
average growth of 14 percent. Latest numbers are even more encouraging (read below).

Despite capturing about 9 percent of the market in sales, the company was in losses up till 2012
but 2013 saw a jump of revenues from Rs 16.6 billion to Rs 30 billion that catapulted its earnings
to Rs 525 million (before tax) from losses. By 2016, before-tax earnings climbed to Rs 5 billion
(Rs 3.5 billion after-tax). The company has also attempted to cut down its indirect expenses such
as selling and advertising to help boost earnings.

Costs have also been reduced over the years but still dependent on imports for inputs, the
changes in global prices and the yen to dollar movement will continue to affect margins. Even
so, improvement is seen as margins have gone up from 1 percent to 15 percent since 2007. Since
2016, yen was strengthening against the dollar which made imports more expensive for Pakistani
automakers. In the first quarter ending June 2016, Honda indeed saw reduced margins due to the
effect of the yen-dollar parity.

However, it has recovered in subsequent quarters and nine-month financials ending December
2016 showed the company had maintained its margins at 15 percent, and improved earnings by
66 percent, year-on-year.

Public appetite and demand has helped a lot and has also boosted investor confidence in the
company, and its stock performance is evidence. The company's stock price shot up from Rs 260
in January 2016 to Rs 814 in January 2017-growing by 3 times in the past year. That is some
phenomenal growth; and in the competitive auto sector, Honda's performance is excellent. The
company's stock outperformed the other two as well as the benchmark index during the past year.

Snapshot of latest Quarter Demand for Honda cars has been higher than ever during this year for
the company and in its third quarter report ending December 2016, revenues more than doubled-
going from Rs 6.87 billion to Rs 15.7 billion resulting in a 144 percent growth in the bottom line.

This was primarily due to the huge boost the company got from historically high sales. Between
October to December 2015, total civic and sales stood at 4,426 units; while sales were 8,512
units between October to December 2016, an increase of 92 percent year on year. The average
monthly car sales also went up. Meanwhile, its competitor Corolla in the same car segment has
seen a drop in sales. The quarter saw reduced margins in this quarter as well due to yen
appreciation but the combined nine-month financials show the margins stood at the same level as
previous year. In fact, profit margins improved from 9 percent to 10 percent in 9M.
Competition and the future of Honda

The car industry in Pakistan has been monopolized by the three foreign brands-Toyota, Suzuki
and Honda with local partners and have maintained their hold in the market through
government's protectionist approach. But a lot is going to change since the government
introduced a liberal auto policy with incentives for new Greenfield projects and for revitalizing
sick units. This has led to several big names expressing interest and at least three confirmed
entries.

French carmaker Renault; Korea's Hyundai and Kia have all signed on with local partners;
Ghandhara Nissan, Nishat and Lucky respectively to bring new models into the Pakistani market.
This will boost competition in a market that is fast growing with average income levels rising,
still has a very low car penetration rate but is hungry for cheaper and more varied vehicles.

Officially, it doesn't seem Honda is opposed to the auto policy and greater competition. In fact,
the company has more outspoken against the burgeoning used cars imports that are allowed into
the country through gift schemes-and are significantly cheaper for consumers. The company in
its annual report suggests that there should be a complete ban on used cars imports which would
"boost the auto industry by 20 percent and create new jobs". The company advocates a policy
with "existing and new players that would encourage current manufacturers to invest more to
expand their production capacities and develop their local infrastructure to enhance competitive
advantage".

Since debating at length over this issue is beyond the scope of this brief recording, it is important
to mention that competition is competition. The new auto policy will cinch some of the market
share of existing car makers-initially new models will be imported in CBU form but for long-
term existence in the sector, these cars will be locally manufactured.

While some may assume that it will take years for new entrants to find their footing in an
industry where Honda, Toyota and Suzuki have been operating for decades and have localisation
too, one can't undermine the effort and investment that would be potentially put in by the local
partners (Nishat and Lucky) who are really good at doing business.

Since most of the new brands will likely bring higher end cars (1300cc and above) where
Honda's two variants and Toyota's Corolla also operate; the competition will be extremely fierce
in this segment, and Honda, as we see it, will be in the thick of it.
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Pattern of Shareholding for the

year ending March 2016 Shares %

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Associated Companies

Honda Motor Company Limited 72,828,000 51%

Shirazi Capital (Pvt) Limited 32,517,000 23%

Shirazi Investments (Pvt) Limited 10,602,650 7%

Atlas Insurance Limited 850,000 1%

Mutual Fund

Meezan Islamic Fund 3,111,300 2%

National Investment (Unit) Trust 2,524,589 2%

Individuals 10,407,257 7%

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Source: Company Accounts

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Honda Atlas Cars (HCAR)- Third Quarter

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Rs (mn) Q3 (Oct-Dec Q3 (Oct-Dec chg

2016) 2015)

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Sales 15,714 6,877 128%

Cost of goods sold 13,527 5,819 132%

Gross profit 2,186 1,058 107%

Distribution & marketing cost 106 94 12%

Administrative expenses 145 84 74%

Other operating expenses 107 73 47%

Other operating income 312 63 394%

Finance cost 7 2 306%

Profit Before tax 2,134 869 146%

Profit After tax 1,492 612 144%

Gross margin 14% 15%

Net margin 9% 9%

EPS (Rs) 10.45 4.29 144%

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