- First EEV license by end April: The government is expected to announce the decision to award the first Energy Efficient Vehicle (EEV) manufacturing license within the next two months i.e. by end April - based on recent newsflows. It is understood that the foreign carmaker may use Malaysia as an export hub besides production for the domestic market. Prior to the EEV program under the new NAP, manufacturing licenses were only issued for the manufacturing of cars above1.8 litre engine capacity and priced above RM150K.

- In talks with four OEMs: Our past meetings with regulators and players suggest that the government has been in talks with 4 foreign OEMs to set up production in Malaysia (via the new EEV licenses). These OEMs are understood to come from Europe, Korea, US and China. We think that Renault (European OEM) will be the first OEM to be awarded. The rest are likely to be General Motors (US), Great Wall (China) and Hyundai (Korea), based on our best guesses.

- Tan Chong Motor (TCM) is the official franchise holder for the distribution of Renault models in Malaysia. While it used to assemble one Renault model (Renault Kangoo) several years ago, production had since been phased out. Renault’s re-entry into the CKD business is not entirely surprising. It had in the past indicated its interest to do so, including exploring partnerships with the national carmaker but things did not materialise. Key European peers VW and Peugeot’s entries into Malaysia and the use of Malaysia as a regional hub perhaps emphasises the need for Renault to keep up with competition in this region - in particular, for it to maintain price competitiveness of its products.

- Key beneficiaries: TCM (HOLD, FV: RM6.00/share) is the immediate beneficiary of Renault’s entry. However, we think that initial production volumes may not be meaningful, estimated at c.300 units/month, which is 2% of Nissan’s total Malaysian sales. The currently underutilised Segambut plant is likely to be used for Renault production. Auto parts players are the broader beneficiaries of the potential entries of all four new foreign OEMs, on top of new investments into EEV production lines by existing OEMs. We think that a form of industry consolidation - to improve cost efficiency and product range in order to penetrate the competitive foreign OEM supply chain - is worth watching out for this year. APM (BUY, FV: RM6.40/share) is our top auto parts maker pick followed by MBM Resources (which owns Hirotako, the only airbag manufacturer in Malaysia and OMI, a steel wheel manufacturer in the midst of moving into mainstream alloy wheel production).

- ASEAN’s first battery, made in Malaysia: Separately, the government (via MAI) has signed an MoU with Arca Corporation Sdn Bhd, AutoCRC Ltd and Swinburne University of Technology. AutoCRC Ltd (established in 2005) is a product of Australia’s Co-Operative Research Centre Program to develop new technologies and capabilities, in particular, vehicle electrification. Batteries account for 30-40% of an EV’s cost, which entails a significant impact on localisation rate if OEMs were to locally assemble EVs here and source locally made lithium-ion batteries. However, the lack of demand may not result in EV production coming immediately in a big way. The lithium ion batteries produced by AutoCRC consortium will initially be used in public electric buses to be developed for the local market. However, having the first move in ASEAN battery manufacturing positions Malaysia well to lock in potential electric vehicle production investments coming into the region moving forward, as it is not feasible to have multiple battery manufacturers in ASEAN given the lack of scale. Thailand had outlined plans to attract a battery manufacturer in its auto industry roadmap 2013-2016, but it has yet to materialise. 

Source: AmeSecurities