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Sunday, November 01, 2009

Automotive sector – shifting up a gear

SOURCE: THE STAR, STARBIZWEEK.

Saturday October 31, 2009

Brought to you by:
MAYBANK-IB Watch
Maybank Investment Bank
By "faudziah"

Automotive sector – shifting up a gear

THE fresh National Automotive Policy (NAP) measures are a short-term neutral but long-term positive, and offer a decent roadmap to the domestic automotive industry. The policy is pro-investment and embraces liberalisation without hurting the national car plans.

A timetable to phase out approved permit (APs) and the introduction of a vehicle end-of-life policy is commendable. The pursuit of green car development will turbo-charge the industry, if executed well.

The plan to issue new manufacturing licences for selected segments, including high engine capacity cars, with 100% foreign ownership, suggests that Malaysia is heading in the right direction in liberalising its automotive sector, transforming it from pro-national car into a regional manufacturing hub, akin to Thailand.

Interestingly, the policy is structured so that it does not hurt further development of the national car programme and franchise holders. It encourages new foreign direct investments without competing directly with local players such as Proton, Perodua, Inokom, Naza Kia (MPV model only), Isuzu-HICOM and Modenas (motorcycles), predominantly in the below1,800cc (cars) and below 200cc (motorcycle) categories.

Proton stands to gain most as the majority of its products are below the 1,800cc segment, and it can offer contract assembly, as it is currently running at 40% of its production capacity.

Other beneficiaries are Tan Chong Motor Holdings Bhd, UMW Holdings Bhd and MBM Resources Bhd (via 38% and 20% stakes in Perodua).

The timetable to gradually phase out the AP system by December 2015 (open APs) and December 2020 (franchise APs) is commendable. It allows existing AP holders to diversify and venture into other businesses.

Terminating the AP system will encourage development of an auto assembly hub. Beneficiaries are automakers and franchise holders who already have assembly presence in Malaysia, namely Proton, UMW and MBM (via Perodua), Tan Chong, DRB-HICOM, Inokom, and Naza.

Meanwhile, implementing a 15-year vehicle end-of-life, which is akin to the scrapping policy, will benefit the industry in terms of replacement cycle, and ties in well with the measure to introduce rigorous vehicle testing standards.

Policy implementation could be unpopular with the rural/lower income group if no rebates are tied to it. Nonetheless, implementation of a 15-year life-span is still high compared to Singapore (10 years).

We are however disappointed that the current RM5,000 non-cash rebate for trade-in of old vehicles enjoyed by Proton and Perodua owners has not been extended to the other marques.

The green car programme is globally new but could turn out to be Malaysia’s “product champion”, if executed well. The global market offers a potential of 11 million units. The incentives for hybrid/electric car development are on par with Thailand’s, which could entice prospective manufacturers/assemblers.

Thailand has a headstart over Malaysia in attracting green car investments but Malaysia is still ahead of the rest. Thailand has managed to rope in 6 OEMs (Honda, Mitsubishi, Toyota, Tata, Nissan and Suzuki) in setting up the eco-car project there.

Honda will commence production in 2010 and the other automakers will start in 2011 (full capacity by 2015: 700,000 units p.a.).

Proton’s search for a strategic partner is not new but being incorporated into an official policy further validates our view that a foreign partner is needed for its long-term competitiveness. Volkswagen and Renault are among the heavyweight names touted to partner Proton.

An established foreign partner is vital to Proton’s long-term competitiveness as Proton needs (i) technical expertise (i.e model development), (ii) marketing expertise and cost synergies (i.e. higher utilisation at its Tanjung Malim manufacturing plant; currently at 40%, lower R&D costs), (iii) new sales markets.

These synergies would eventually enhance shareholders’ value.

We are surprised that the revised NAP did not clear up the definition of a national car. For the consumers, with no change to sales, import and excise duties, vehicle prices are set to remain unchanged.

We maintain our earnings forecasts for auto stocks under our coverage, as the industry makeover will be gradual. Overall, Proton is a clear winner. UMW, Tan Chong and MBM do not lose out either.

We lift the sector to Overweight following recent upgrades to Proton and Tan Chong. We continue to recommend Buy on Proton (target price: RM5) and Tan Chong (RM3). Maintain Hold on MBM (RM2.40) and UMW (RM6.35).

END OF SOURCE.

References:
1) http://biz.thestar.com.my/news/story.asp?file=/2009/10/31/business/5014538&sec=business

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