UzAuto Motors warms up as competition approaches

UzAuto Motors (UzAuto), with a domestic market share at some 95%, for decades has been under harsh criticism by ordinary citizens in Uzbekistan, Central Asia's most populous state. With the average monthly salary in the country staying at $250, it was quite difficult for people to save money to buy a long-awaited vehicle. The secondary market also left much to be desired, as, amid high import duties, people were forced to buy domestic cars at a fairly high price.

People constantly asked themselves, what would Uzbekistan lose if the automobile plant would shutdown? According to Aleksandr Sahapov, the head of the financial department at UzAuto Motors, some 18,000 people would lose their jobs if the factory someday closes.

He said: “If you calculate that each employee has a family, then this figure must be multiplied by the number of family members. Moreover, the country's budget will lose huge numbers, as the company pays some $400mn annually in VAT alone”.

An indisputable fact is that cars produced by UzAuto enjoy a big demand not only within the country, but in neighboring states also. For instance, sales of Uzbekistan-assembled cars in Kazakhstan soared by 4,697% y/y in January to April, according to the Association of Kazakhstan Automobile Businesses.

UzAuto to date operates in an alliance with General Motors Company (GM) (Baa3/BBB/BBB-), which provides it with GM’s brands and technologies. A long-term licence agreement implies the payment of royalties from car sales to GM. The agreement was renewed in 2017 and is valid until 2027. In fact, Uzbekistan is the fourth largest market for GM in terms of Chevrolet sales (after the US, China and Brazil).

Light at the end of a tunnel

With huge transformations underway in the country under the leadership of President Shavkat Mirziyoyev, massive reforms have been declared in the automotive industry also.

UzAuto, within its 2030 Development Strategy plans to expand its localisation programme, sell some of its non-core assets, and launch the production of electric vehicles (by 2027).

The import of electric cars, as part of the Uzbek government’s decarbonisation goals, has already been enjoying zero customs duties and excise tax. And UzAuto’s plans to produce its own e-cars could be considered as a light at the end of the tunnel, which would definitely result in the creation of a fair competitive environment.

Tools to achieve goals

UzAuto is currently 100% owned by the Ministry of Finance of Uzbekistan (B1/BB-/BB-). Both S&P and Fitch rate UzAuto one notch below Uzbekistan’s sovereign rating: at B+ with a ‘Stable’ outlook. According to the government’s plans, the company is projected to carry out IPO by 2024. Within the framework of these goals, it plans to issue additional shares worth up to 10% of its authorized capital.

At the end of April, UzAuto placed its debut $300mn 5-year tenor Eurobond at a yield of 4.85%. Currently, UZAMTS 26 is quoted near par levels, with a spread of some 180-190bp above the Uzbekistan sovereign curve, according to the Russian investment bank VTB Capital (VTB). VTB expects UzAuto’s credit ratios to weaken in 2021-22, on the back of its CAPEX increase, and to normalise thereafter.

“The company’s dominant market positions in Uzbekistan, prepayment basis of car sales and healthy consumer demand (which drives Uzbekistan’s macro performance) support our overall stable view on the credit”, - it said, adding that the relatively old car fleet in Uzbekistan is likely to support the demand for UzAuto’s products in the coming years.

The company intends to devote the larger part of the Eurobond proceeds toward the expansion of its production facilities in order to launch new car models.

S&P forecasts the company’s car sales in 2022-23 to drop by 5-10% YoY, assuming the gradual ramp up of sales under the GEM Project. Nevertheless, both Fitch and S&P expect UzAuto to deliver single-digit revenue growth over 2021-23, as the potentially lower sales would be offset by higher prices.