• KHPT Group is involved in the manufacturing and distribution of automotive partsand components, including body parts, seat structures, engine parts, and absorbers.

• We project the revenue to grow at 3.2-14.1% to RM117.8m-RM141.4m for FY24-26f,while the core net profit is expected to increase by 12.6-19.3% to RM6.6m-RM8.6m,supported by the (i) sustainable growth in local brands, (ii) supportive incentive andgovernment policies, and (iii) operational facilities expansion plan.

• We assign a fair value of RM0.285 (upside of 42.5% against IPO price of RM0.20) for KHPT. Our valuation is derived by pegging a P/E of 15x to the FY25f EPS of 1.9 sen. We believe it is fair as the FBM Small Cap long term P/E ratio stood at 14.5x, while the current P/E for FBM Small Cap is trading at 19x.

Investment highlights

Local brands continue to dominate the automotive industry. Proton and Perodua, Malaysia's leading automotive manufacturers, are key drivers of growth in the automotive parts and components sector. In 2023, Perodua remained the top automotive brand in Malaysia, with Proton as the second largest (Fig #1).

Outstanding Perodua sales to benefit KHPT. According to the Malaysia Automotive Association (MAA), Perodua sold 169,849 vehicles in 1H24, a 17.4% YoY increase from 2023. Its market share also grew by 4%, reaching 43.5%. Together, these brands increased their combined market share from 53.60% in 2017 to 60.18% in 2023, achieving a CAGR of 2.34%, supported by the introduction of new models like the X70, X90, Aruz, and Ativa, which drive the demand for new parts and components, encouraging more automotive parts localisation. In 2024, both the brands held a 67.8% market share in the passenger car segment and contributed 62% of the TIV. Automotive parts suppliers like KHPT, with nearly 30 years of industry experience, stand to benefit from this sustainable growth and the standardization of parts across vehicle models.

Malaysia’s automotive Industry… Additionally, the growth of the automotive parts and components industry in Malaysia is closely tied to the automotive sector’s growth, as reflected in the TIV. From 2017 to 2023, TIV grew at a CAGR of 39.1%, with registered passenger vehicles accounting for over 85% of the TIV. According to IMR, moving forward, forecasts for TIV are expected to stabilize in 2024 after hitting an all-time high, combined with economic uncertainties. However, we anticipate the industry to continue growing at a steady pace, driven by a combination of (i) increasing disposable incomes and (ii) a strong car-centric culture.

The National Automotive Policy 2020 (NAP 2020). Malaysia has positioned itself as an attractive and competitive hub for automotive manufacturing, supported by several incentives. These include: (i) Full exercise duty and sales tax exemptions on CKD electric vehicles (EVs) until 2027. (ii) Import duty exemptions on CBU EVs until 2025. These measures aim to reduce costs for EV assemblers and spark local demand; thus, translating potentially to higher local content and boosting the demand for KHPT’s expertise and products. The NAP 2020 also promotes digital transformation and smart manufacturing to enhance competitiveness and efficiency in the automotive sector. This benefits manufacturers of both EV and non-EV components.

Operational facilities expansion… KHPT is planning to expand its operations by renovating its existing factory in Teluk Panglima Garang (TPG). The facility spans a total built-up area of approximately 106,000 square feet, comprising a double-storey office (5,847 square feet) and a single-storey factory (92,031 square feet).

…and housing new machinery and production lines. The expansion includes the installation of four new press machines and automation equipment to establish a new automated body parts production line, which will increase KHPT’s manufacturing capacity by 400 pieces per hour, resulting in an additional capacity of 2,260,800 pieces, translating to an increased total capacity by 83.3% to 5,765,760 pieces from estimated annual manufacturing capacity of 3,144,960 pieces in FPE24. Additionally, KHPT will acquire a 15-ton overhead crane to enhance its lifting capability, making it easier to transfer heavy dies between storage and press machines.

Company background

KHPT Group is primarily involved in the manufacturing and distribution of automotive parts and components, including body parts, seat structures, engine parts, and absorbers. The company works closely with customers to produce customized parts based on specific technical requirements.

Business overview

Automotive parts and components. KHPT specialises in the manufacturing and distribution of automotive parts and components. The group operates primarily from the Telok Panglima Garang Factory, which also serves as its headquarters.

i) Manufacturing of automotive parts and components (98.6% of FY23 revenue). This is KHPT's largest revenue segment, contributing over 90% of total revenue. The company specializes in producing parts for OEMs, serving major automotive brands like Proton (for models such as the Saga, Perdana-R, X50, and X70) and Perodua (for models like the Axia, Alza, Ativa, and Myvi).

ii) Dies solution services (1.4% of FY23 revenue). KHPT also provides solutions for designing and developing dies and jigs for automotive parts. This service is essential when new parts are introduced, specifications are changed, or manufacturers switch platforms.

Financials

Revenue highlights. KHPT reported revenue of RM114.1m in FY23, a decrease of 1.8% YoY, mainly due to lower revenue generated from its body parts segments. However, these declines were partially offset by an increase in sales from the structural seat segment, which rose by RM7.6m, or 20.4%, to RM45.1m for FY2023 (FY2022: RM37.5m). Core earnings decreased by 37.1% YoY, reaching RM5.5m.

Earnings forecasts. We are projecting a 3-year earnings CAGR of 16.0%, where the core PAT stood at RM6.6m, RM7.7m and RM8.6m over the next 3 years, supported by (i) the expansion of operational facilities, (ii) sustainable growth from local OEMs, and (iii) supportive government initiatives and policies. The body parts manufacturing division is expected to continue growing, benefiting from its operational facilities expansions, which are anticipated to increase its production capacity by 83.3% to 5,765,760 pieces, up from an annual manufacturing capacity of 3,144,960 pieces in FPE24. Additionally, the sustainable growth of local OEMs and the positive outlook for TIV are expected to spark more business opportunities for the group.

Valuations

We ascribe a fair value of RM0.285 (upside of 42.5% against IPO price of RM0.20) for KHPT. Our valuation is derived by pegging a P/E of 15x to the FY25f EPS of 1.9 sen. Although the ascribed P/E is slightly above the market weighted P/E of 13.88x by 8.1% of the closest peers (Fig #6) which their P/E ranges around 7-18x, we believe it is fair as the FBM Small Cap long term P/E ratio stood at 14.5x. Also, do note that the current FBM Small Cap index is trading at P/E ratio of 19x at this juncture.

Investment risks

Dependency on its major customers. Any loss of these major customers and inability to replace these major customers with new customers or with additional orders from existing customers in a timely manner, could result in a loss of revenue and will have an adverse impact on the group’s financial performance.

Dependency on skilled personnel for the design and manufacturing processes. The loss of a substantial number of the group’s technical personnel without suitable and  timely replacements may adversely affect its ability to compete and grow in the automotive parts and components manufacturing industry.

Exposure to material supply chain disruption. The primary raw materials used in its manufacturing activities are steel coils and steel cut sheets. Any prolonged shortages and/or delays in the supply of raw materials may affect its business operations.

Reliance on key senior management. The discontinuation of key senior management could disrupt decision-making and business operations.

Source: Mplus Research - 24 Sept 2024