SAZEW to See 168% Earnings Driven by High Demand for Chinese Haval Brand

Staff Report
Pakistan’s 3-wheeler (rikshaw) turned 4-wheeler assembler, Sazgar Engineering (SAZEW), is set to witness a 168% earnings CAGR during FY24-26 owing to increased demand in both Petrol and Hybrid versions of the Chinese Haval brand.

Our Discounted Cash Flows (DCF) based Jun 2025 target price for SAZEW is Rs1,613/share, providing a total return of 98% including a dividend yield of 8%,” Topline said adding that our liking for this stock emanates from (1) rising four-wheelers sales to a monthly average of 700+ units compared to the last 6 months’ average of 541 units, (2) superior gross margins of +28% compared to other players’ margins of 9-11% (FY23) operating under the Auto Policy 2016-2021, (3) likely commencement of the local assembly of new models currently launched under the testing phase, Tank and Ora, and (4) attractive valuation with FY25E PE of 3.1x, compared to the sector average forward PE of 9.8x.Senators Elected as Chairmen of Key Senate Committees

Rising four-wheeler sales to drive earnings exponentially: SAZEW is currently selling 700+ units per month, and in a recent analyst briefing, management highlighted the potential of touching over 40% utilization, which could take monthly sales to 800 units, in our view. We have assumed 775 monthly units for FY25, taking annual sales to 9,300 units (39% utilization), up 76% from the FY24E level of 5,283 units. For both FY26 and FY27, we have assumed growth of 5% in SAZEW 4-wheeler volumes.

Superior gross margins amongst auto players: SAZEW reported gross profit (GP) margins of 29% in 3QFY24. However, based on our working, primary margins during the same quarter remained around 38% in the 4-wheelers segment. Management anticipates margins to sustain owing to (1) tax benefits under Auto Policy till 2026 and (2) the company’s operations in the SUV segment, which is relatively less price-sensitive. In our analysis, we have arrived at GP margins of 30% for FY25/26 after averaging at 28% in FY24. Post FY26 or after the conclusion of tax benefits, we have assumed GP margins of 21%/17% in FY27/28.

Launch of new models: SAZEW has recently introduced a high-end off-road SUV “Tank” and electric vehicle “Ora.” Both of these models are currently in the testing phase, and any success in testing can lead to the decision of local assembling. To note, the Tank model of the company holds a record of being the top-selling SUV in China, with annual sales of 163k units in 2023.

Key risks to our thesis are (1) lower-than-expected auto sales, (2) the launch of similar category models by other players, (3) currency fluctuation, and (4) change in regulatory duty structure. Furthermore, sponsors and management have relatively less experience in managing the 4-wheelers segment, and their restricted approach to addressing analyst/investor queries, except for analyst briefings, may delay efficient price discovery of the company, we believe.

Valuation: We have used FCFE using DCF-based valuation methodology. Based on that, we arrive at the Jun 2025 target price of Rs1,613/share, suggesting a total return of 98% as of the July 4, 2024, closing price of Rs849.75/share. On the PE valuation front, the auto sector (HCAR/INDU) has traded at a forward PE of 9.82x, 40% higher than the forward market average PE of 7x. Our target forward market PE for Jun 2025 is 4.6x, with a 40% premium; the auto sector fair multiple reaches 6.45x. This suggests a Jun 2025 target price of Rs2,038 for SAZEW using FY26 EPS of Rs316, translating into an upside of 140%.

Dividend Outlook: Based on the recent analyst briefing, management also indicated a soft policy of paying out dividends. Considering this, we believe the stock also offers a dividend yield of 8% in FY25 at a payout ratio of 20-25%.