- Perodua joins the bandwagon: It was reported in a local daily this morning that Perodua is aiming to offer more affordable cars with enhanced quality and better car ownership benefits. This news comes hot on the heels of BMW, Proton and Bermaz’s announcement to reduce the selling price of their models. As a recap, BMW will introduce the first CKD variant of its Mini Countryman, which will see a price reduction of 30% resulting from duty savings from local assembly and local parts sourcing. Proton meanwhile, introduced a basic variant of its Saga model called the SV, which is priced 12% cheaper than the existing Saga variants, while Bermaz announced better deals for its CKD Mazda 3 and Mazda CX5 models.

- Vendor cost down supports competitive pricing: As highlighted in our recent MBM visit note (dated 6th June), Perodua has achieved 12% cost reduction from its vendor cost down initiatives since December 2012. We also understand from management that despite the introduction of “value” variants such as the S-series and offers for 3-year free maintenance for its models – which are equivalent to RM4,000-5,600 in value - Perodua’s cost cutting initiatives more than offset these promotional cost. Additionally, Perodua-Daihatsu’s new transmission plant is expected to be commissioned in November 2013, which will further enhance localisation rates and reduce duty cost for Perodua’s Viva replacement model, which is expected to be introduced in early FY14F. Under its cost reduction program, Perodua aims to reduce its overall costs by a further 17% by FY14F.

- Price reduction comes at little expense of margins for the manufacturers: The trend for car price reduction is now more pronounced, but we believe this will come at little expense of margins for the auto manufacturers. For the national carmakers, price reduction is achieved by parts price reduction by local vendors and internal cost cuts (Proton is aiming to reduce material cost by 30% in the next 2-3 years by further streamlining its vendor network), while for the non-nationals, price reduction is achieved by increasing localisation, hence allowing players to get around excise duties (excise duties are only chargeable on imported components). The reason for the different strategies to achieve lower car price is that non-nationals are currently on average only 30%-40% localised, whereas national carmakers such as Perodua and Proton have already achieved 80%-90% localisation rate. In the near-term, car manufacturers and distributors may benefit from better sales volumes arising from introduction of cheaper variants, but vendors will likely be hit by an on-going price reduction program.

- Maintain OVERWEIGHT on the auto sector: TCM (BUY, FV: RM7.50/share) remain our top sector pick. Key catalysts for TCM include: (1) Introduction of “affordable” MPV variants in early 3Q13; (2) Introduction of A and B segment models in FY14-15; (3) Possibilities of clinching new contract assembly business domestically; (4) Possibilities of becoming a an export hub for Datsun in the next 2 years.

- We also like MBM (BUY, FV: RM4.60/share) for a cheaper access to Perodua (FY13F PE of 10x vs. UMW’s 16x), which is a big beneficiary of the weaker Yen, as well as exposure to MBM’s comprehensive manufacturing license. Key catalysts include: (1) NAP announcement on Malaysia’s EEV initiatives and incentives; (2) Franchise wins, which gives MBM better distributorship margins vs. 1%-2% dealership margins currently; (3) Introduction of new models by Proton and Toyota which will benefit MBM’s auto part division albeit at the expense of margins; (4) Further cost down initiative at Perodua. MBM is a net beneficiary of the parts price reduction as Perodua accounts for 60% of earnings vs. 20% from its auto parts division.

Source: AmeSecurities