- We raise APM to BUY from HOLD and raise our fair value to RM6.40/share (from RM5.40/share previously), after raising our projections by 10%-16%. Our valuation pegs APM at 9x FY14F earnings at a 25% discount to auto manufacturer peers.

- APM is a key beneficiary of the expected influx of new capacity into the market, riding on the launch of Malaysia’s Energy Efficient Vehicle (EEV) program. MAI targets total vehicle production to more than double to 1.3mil by 2020 from an estimated 600,000 in 2013. In the immediate term, the volume growth will be primarily driven by:-

- (1) Honda Malaysia’s capacity expansion to 100K from 40K-50K following Honda Japan’s decision to make Malaysia its regional hybrid production hub. Targeting localisation rate to increase to over 70% from 40% currently;

- (2) System supplies to Mazda Malaysia – CX5 and upcoming Mazda 3 and 6. Both the CX5 and Mazda 6 are also slated for exports out of the Malaysian plant which APM supplies to. Honda and Mazda are two of APM’s top 10 customers;

- (3) Proton’s capacity expansion to 420,000 units/annum from 360,000 driven by its Global Small Car launch with a targeted initial volume of 5,000/month (60,000/annum on average). In the mid-term, Proton plans to sell up to 500,000 cars per annum (2017/18 target); and

- (3) Doubling in Perodua’s capacity within the next 12 months; new plant to be operational by mid-FY14, but it might encounter teething problems initially. By 2H14, launch of the new Viva with a targeted volume of 4.5K-5.5K/month.

- APM’s Indonesian unit, which is a Tier-1 supplier to Daihatsu is likely to see earnings catalysed by Indonesia’s recently launched Low Cost Green Car (LCGC) program, which focuses on making Indonesia a production hub for cheap, fuel efficient minicars. Daihatsu, via its Ayla model, is the first to participate in the program. Around 5mil Indonesian household is expected to be able to afford a car by 2020, more than double the 2010 figure, thanks to the LGCG initiative. APM’s overseas units and exports currently account for 9% of revenue.

- Meanwhile, the impact of vendor cost-down since late 2012 is likely to reach a bottom by mid-FY14 and takes away a key earnings risk which led to our downgrade previously.

- At 8x FY14F earnings, APM is a cheap proxy to the new NAP, despite being one of the key indirect beneficiaries of the measures announced. Attractive dividend yield of 5.6% (45% payout ratio) provides cushion to any share price weakness. Renault, which has been exploring local assembly of its models (likely via APM’s sister company, Tan Chong) is a potential upside catalyst in the near-term.

Source: AmeSecurities