HC remained positive on GB Auto's 2012 earnings (and going forward: 2012–16e net income CAGR of 24%), expecting to be skewed towards 2H12e as political and economic uncertainty subsides after presidential elections. Net income grew 136% y‐o‐y to EGP18m in 1Q12 (due to positive base effect) but declined 59% q‐o‐q, missing HC's estimate by 52% as margins hit a record low. Revenue rose an impressive 32% y‐o‐y to EGP1.7bn from an exceptionally low base in 1Q11 impacted by the revolution in Egypt but fell 9% q‐o‐q and a marginal 2% short of forecast. Although gross profit increased 24% y‐o‐y to EGP186m, gross margin compressed to a record low of 10.9% (down 65 bps y‐o‐y and 208 bps q‐o‐q, 118 bps below estimate) on slimmer than expected margins from the two‐ and three‐wheeler and PC segments in both Egypt and Iraq. Operating profit came in at EGP94m (up 35% y‐o‐y but down 37% q‐o‐q), falling 22% short of our numbers on the gross margin miss as SG&A (up 14% y‐o‐y) was perfectly in line with our estimate and flat q‐o‐q. Net income was impacted by EGP12m in forex losses. Political unrest impacted the company's PC operations in both Egypt and Iraq. Despite a strong pickup in GB Auto Egypt's PC sales volume in 1Q12 (up 69% y‐o‐y versus 31% for the market) on the back of sustained market share gains (34% in 1Q12), gross margin disappointed (10.1% in 1Q12 versus 10.5% in 1Q11 and 11.8% in 4Q11) as the company (1) withheld units from the market amid falling consumer sentiment and sharp price sensitivity due to economic uncertainty and (2) made some price discounts on the Verna (boosting the company's market share to 41% in March). Key risks HC defined main risks that may face GB Auto in Egyptian market, noting; a slower than expected pace of recovery in Egypt's PC market, weaker than expected sales from the new Geely PC representation, continued Hyundai PC supply shortages in Egypt and Iraq, erosion of GB Auto's market share, especially in Egypt, a more prolonged slowdown in CV demand and weaker than expected performance from the company's new ventures.
