• Expect 1Q18F earnings to grow 11% yoy and 5% qoq to Bt115m; NPL ratio should remain at 4.7% (flat qoq)
• Motorcycle sales were weak in 1Q18 but should improve along with farm income; overseas HP loan operations remain strong and are expected to grow by 2.5 times in 2018
• OUTPERFORM, Bt20 GGM-based TP implies 2.0x FY18F P/BV; trading at discount to peers average valuation

Expect HP loan portfolio to grow 1% YTD and 13% yoy

We expect TK to report satisfactory earnings in 1Q18 despite weak motorcycle sales in Thailand. In 1Q18, Thai motorcycle sales fell 2% yoy due following a drop in farm income (index fell c.5% yoy). However, we expect TK’s Thai motorcycle HP loans to be flat qoq and grow 12% yoy, better than industry numbers. Overseas HP loans should continue to grow by 25% in 1Q18. This would lead total HP loans to grow 1% YTD and 13% yoy. Net interest income should increase 15% yoy thanks to higher NIM of 33% (flat qoq and yoy). Asset quality should not be worse than in 4Q17, so NPL should be flat qoq at 4.7%. We also assumed TK would maintain NPL coverage ratio at 126% (vs 122% in 4Q17). Overall, earnings should grow 11% yoy and 5% qoq to Bt115m.

Increasing overseas branches to 12 from 7 currently

Some investors are concerned about soft HP loan growth in 1Q18 (+1% YTD) but we will maintain HP loan growth assumption at 10% for 2018, in line with management guidance, as we expect Thai motorcycle sales to recover gradually along with farm income, which was dragged by weak chicken and pork prices in 1Q18. But pork prices have been improving since April. We forecast Thai HP loans will grow 5% in 2018. The remaining 5% growth should come from overseas operations as TK plans to open 2 more branches in Laos (1 now) in 1H18 and 3 in Cambodia (6 now) in 2H18. We forecast overseas HP loans will grow to Bt1.0bn in 2018 from Bt0.4bn at end 4Q17. 

Opportunity to accumulate stock

TK’s loan growth may look weak in 1Q18 but we expect more broad-based economic recovery to support growth in subsequent quarters. Our sensitivity analysis shows a 1% drop in loan growth would reduce earnings by 2%. Our TP is intact at Bt20/sh based on 14% ROE, 11% cost of equity, and 7% growth. TK is trading at 1.3x FY18F PBV and 11.5x FY18F PE, cheaper than the Consumer Finance sector average of 2.9x and 14.9x, respectively.