-  It was reported in Business Times that the Government will continue to back the national car project, but not at the expense of other local and foreign players. According to En. Madani (CEO, Malaysian Automotive Institute), the assistance however, will now skew towards enhancing the national car manufacturers’ competitiveness and efficiency to lower production cost. Madani also mentioned that the overall policy is to support the entire automotive ecosystem to benefit local and foreign players, and that both Proton and Perodua have designed their own transformation plan to shape their future.

-  While we acknowledge the national cars’ role in preventing monetary outflow from the country, the business model of the Malaysian automotive industry (vendors in particular) that is now very reliant on national cars seems to be holding back further development. At present, the local auto part industry significantly lacks scale which indirectly causes pricing to be on average 20% to 30% higher than key competitors in Thailand. As a result of the inward looking policies in the past, local vendors have been very reliant on national car manufacturers to drive scale (70%-90% of vendors’ revenue typically comes from supply to national cars).

-  The stumbling blocks faced by the national cars to penetrate the export market in a big way, and their reliance on the increasingly saturated local car market is dragging the development of the local support industry. Malaysia has already achieved high vehicle penetration rate at >70% for a population base of 28mil, relative to Thailand and Indonesia, which entail population size more than triple ours and entail 30%-40% vehicle penetration rate.

-  The potential liberalisation of license issuance and the Energy Efficient Vehicle (EEV) program in the upcoming NAP review is likely to pave way for the creation of a more level playing field, a more competitive tax incentive structure and the creation of a more competitive export hub to entice more significant production capacity (including export capacity) into the country, which in turn will create significant scale for vendors.

-  While national car makers might initially be hit by new competition and liberalisation, they are actually the biggest beneficiaries of potentially more competitive pricing from local vendors given very high localisation rates of 80%-90%. Perodua, which has achieved very high penetration rate of 90%, will see a doubling in capacity by mid FY14F (to 400K/annum) from a new, highly automated plant (comparable to Daihatsu’s plants in Japan) and increased localisation from its new transmission plant. Coupled with Malaysia’s position as a key overseas market for Daihatsu (accounting for almost half of Daihatsu’s overseas volumes on our estimates), Perodua looks well positioned to become one of Daihatsu’s key export hub.

-  Maintain our contrarian OVERWEIGHT on autos. A key catalyst would be the launch of Malaysia’s EEV program which will provide significant tax/duty benefits (duties accounts for 30%-40% of operating cost for a manufacturer), deeper localisation and incremental production volume. TCM (BUY, FV: RM7.50/share) and MBM (BUY, FV: RM4.60/share) remain our top sector picks.

Source: AmeSecurities