Aeon Thana Sinsap Thailand: Still a HOLD
- AEONTS’s 3QFY25 (Sep-Nov 2024) earnings came in at THB789mn (+11.7% y/y, -4.1% q/q), beating expectations
- 4QFY25F to improve q/q
- Focusing on quality growth
- Maintain HOLD with a lower TP of THB130
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The y/y increase was attributed mainly to lower expected credit loss (ECL), while the q/q decline was due to lower interest income (from portfolio contraction and lower average yield), higher interest expense (from higher cost of funds – despite lower funding base), and lower other income (i.e., there were no NPL sales in 3QFY25).
Its pre-provision operating profit (PPOP) was THB2.6bn (-4.9% y/y; -12.6% q/q). The y/y decline was attributed to (i) lower interest income (from portfolio contraction – despite higher yield due to a higher proportion of revenue from personal loans vs. credit card) and (ii) higher interest expenses (from higher cost of funds – despite lower funding base). Meanwhile, the q/q decrease was due to lower interest income, higher interest expenses, and lower other income.
Its 9MFY25 accounted for 73% of our FY25F forecasts.
Loan portfolio contracted further q/q amid ongoing NPL write-offs and a conservative lending approach. Portfolio contracted 4.4% y/y and 1.8% q/q, and 1.7% YTD-Nov to THB89.8bn at end-3QFY25.
On top of ongoing NPL write-offs, AEONTS continued to focus on low-risk customer groups that have high spending power and a high ability to repay debts. These customers typically repay their loans in full (i.e., paying no interest).
With that and the increase in the minimum credit card payment to 8% from 5% since 1 Jan 2024, credit card loans declined 6.5% YTD to THB38,468bn and made up of 42.9% of total loans at end-3QFY25 (vs. 43.1% at end-2QFY25).
Meanwhile, personal loans remained stable from end-FY24 at THB43.1bn and made up 48.0% of total loans at end-3QFY25 (vs. 47.8% at end-2QFY25).
In the meantime, hire purchase (HP) loans increased 23.0% YTD to THB8.2bn, making up 9.1% of total loans at end-3QFY25 (vs. 9.0% at end-2QFY25).
Note that in Thailand, other than used-car HP, AEONTS offers HP loans for environment-friendly products, such as electric motorcycles and solar cells, while offering HP for electrical appliances, mobile phones, etc. in overseas markets.
In addition, it also offers vehicle title loans, i.e., “AEON Auto Quick Cash”, for its current customers, focusing on inclusive credit access to support social sustainability.
Only credit card revenue dropped y/y in 3QFY25. Total revenue increased 2.2% y/y but declined 3.3% q/q to THB5.5bn in 3QFY25. Credit card revenue declined 9.8% y/y to THB1.8bn, accounting for 32% of total revenue. The decline was due to the higher minimum credit card payment (i.e., increasing to 8% from 5% since 1 Jan 2024) and the higher number of full-payment credit card accounts compared with that in 3QFY24.
AEONTS has continued to expand its service channels through online platforms, making it more convenient for customers while reducing the company's operating costs. With that, Cardless Withdrawal transactions continued to increase, accounting for 99% of new personal loans. As such, personal loan revenue increased 1.8% y/y to THB2.5bn, accounting for 44% of total revenue.
Meanwhile, HP revenue increased 28.9% y/y to THB322mn, accounting for 6% of total revenue. The increase was thanks to the company’s boost of promotions and marketing activities.
Other income increased from gains on sale of investment in subsidiary and income from bad debt recovery. Recall that AEONTS’s other income comprised mainly (i) income from bad debt recovery, (ii) gain from NPL sales, (iii) insurance commission income, and (iv) collection service income.
In 3QFY25, other income increased 26.2% y/y but declined 7.5% q/q. The y/y increase was attributed to a gain on sale of investment in subsidiary (THB94mn) and higher income from bad debt recovery (THB532mn; +13.7% y/y; accounting for 9.6% of total revenue).
Note that other income accounted for 17% of total revenue in 3QFY25, in line with the company’s strategy to shift its revenue contribution towards fee-based income – premising on growth from insurance and asset management businesses.
NIM declined on loan contraction and rising cost of funds. With its loan portfolio shifting towards HP loans (at the expense of credit card loans), while the proportion of personal loans remained relatively stable, AEONTS’s yield continued to increase y/y. Nonetheless, interest income declined 1.7% y/y and 2.4% q/q in 3QFY25 due to loan contraction.
Specifically, its portfolio comprised 48.0% personal loans, 42.9% credit card loans, and 9.1% HP loans at end-3QFY25 (vs. 47.8%, 43.1%, and 9.0% at end-2QFY25).
However, despite the decline in its funding base amid slow lending growth and high cash inflow from credit card loan repayments, AEONTS’s interest expenses increased 17.4% y/y and 7.5% q/q in 3QFY25 due to rising cost of funds – i.e., higher interest rates for its rolled-over debts.
Net-net, nonetheless, its spread decreased y/y and q/q to 16.2%, and NIM also contracted y/y and q/q to 17.5% in 3QFY25.
NPL ratio increased due to loan contractions. NPLs declined 0.3% q/q to THB5.3bn. However, NPL ratio increased to 5.9% at end-3QFY25 (vs. 5.8% at end-2QFY25) due to loan portfolio contraction in 3QFY25.
ECL decreased 9.3% q/q to THB1.8bn in 3QFY25, thanks partly to ECL reversal (THB118mn) from sale of AEON Microfinance (Myanmar), on top of its overall asset quality improvement.
Meanwhile, credit cost decreased to 8.0% in 3QFY25 (vs. 8.7% in 2QFY25). Coverage ratio decreased to 152% at end-3QFY25 (vs. 159% at end-2QFY25) due to the decline in ECL allowance from AEON Microfinance (Myanmar) upon the sale transaction.
Outlook
Peaked credit cost. We believe AEONTS’s credit cost already peaked at 9.1% in 1QFY25 and expect it to continue tapering down towards year-end.
Despite the company’s NPL write-offs and sales planned for 4QFY25F, its credit cost should continue to decline from 3QFY25, as those NPLs should have largely already be covered by ECL.
We expect to see a lower credit cost in FY26F, given that the company plans to revisit its ECL model assumptions (with positive adjustments expected) in Feb 2025, leading to potentially lower ECL in FY26F.
Asset quality to improve. Management revealed that the company’s collection performance has gradually improved, resulting in improving portfolio quality and thus potentially lower credit cost.
Meanwhile, the company has continued to assist customers by offering loan restructuring programmes to selected customers in Stage 1 to prevent them from falling into Stage 2 and to Stage 2 customers to help them get back to Stage 1. The programmes should help improve customers’ ability to pay debts and thus enhance AEONTS’s overall asset quality.
Focusing on quality growth. Management believes an improvement in economic factors, such as an increasing number of tourists and rising minimum wages, will benefit the company’s asset quality as well as its lending growth.
Moreover, with its new credit scoring models for personal loans and credit card in place, AEONTS is now ready to expand its quality portfolio.
Lower cost of funds ahead. The proportion of the company’s long-term to short-term debts was 45:55 at end-3QFY25. This implies that the large part of its debts (55%) will reprice faster with the market interest rate – which is trending down.
Meanwhile, only about 50% of long-term debts due in one year were borrowed at low interest rates. This part of the debts will be repriced at higher rates.
Another 50% were at interest rates close to the current market interest rates, which means they may be repriced at lower interest rates, given the declining interest rate trend.
4QFY25F to improve q/q. With the expectation of improving asset quality and economic outlook, AEONTS believes its portfolio would expand again in 4QFY25F. Meanwhile, the company plans to sell NPLs and realise gains from sales in 4QFY25F, while expecting a good amount of income from bad debt recovery to continue to boost revenue in 4QFY25F. With that, we expect AEONTS to see 4QFY25F earnings to improve q/q but decline y/y from higher credit cost.
Maintain HOLD with a lower TP of THB130. As we incorporated AEONTS’s 3QFY25 results, fine-tuned our forecasts, and rolled forward our valuation base to FY26F (end-Feb) with a lower P/BV multiple, we derived a lower TP of THB130 (vs. THB141 previously). Our new TP is based on 1.2x FY26F (end-Feb) P/BV (vs. 1.3x P/BV previously), i.e., 1.5SD below its 5-year average P/BV.
While we believe AEONTS is well equipped to bounce back and rerate with the economic recovery, we estimate its FY25F earnings would contract 9.9% y/y due to loan contraction and higher credit cost. With that, our HOLD rating stands. A clearer sign of improving asset quality may prompt us to review our recommendation.
| FY Feb | 3Q2024 | 2Q2025 | 3Q2025 | % chg yoy | % chg qoq |
|---|---|---|---|---|---|
| Net Interest Income | 4,139 | 4,126 | 3,971 | (4.1) | (3.8) |
| Non-Interest Income | 755 | 1,030 | 953 | 26.2 | (7.5) |
| Operating Income | 4,894 | 5,157 | 4,924 | 0.6 | (4.5) |
| Operating Expenses | (2,114) | (2,132) | (2,187) | 3.5 | 2.6 |
| Pre-Provision Profit | 2,780 | 3,024 | 2,736 | (1.6) | (9.5) |
| Provisions | (1,899) | (1,986) | (1,802) | (5.1) | (9.3) |
| Associates | 0.00 | 0.00 | 0.00 | - | |
| Exceptionals | 0.00 | 0.00 | 0.00 | - | |
| Pretax Profit | 881 | 1,039 | 935 | 6.1 | (10.0) |
| Taxation | (171) | (207) | (114) | (33.3) | (45.0) |
| Minority Interests | (3.89) | (9.32) | (32.1) | (724.5) | 244.2 |
| Net Profit | 706 | 822 | 789 | 11.7 | (4.1) |
| Growth(%) | |||||
| Net Interest Income Gth | (1.4) | 0.7 | (3.8) | ||
| Net Profit Gth | (16.1) | 56.8 | (4.1) |
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