- The Yen is a friend: The Yen has depreciated considerably and is now at JPY2.93 against the MYR. This is almost at the low of JPY2.91:MYR seen in Mar 2014 (See Chart 1). The weaker JPY benefits importers, as it lowers effective import costs. CKD kits and CBUs account for 30%-35% of an auto players’ cost, of which between 10%-70% comprise imported kits, depending on the depth of localisation.

- Auto companies import CKD kits and CBUs mainly in USD and JPY, but the majority have already switched to the USD as currencies for imports under arrangements with their respective principles. Generally, the JPY accounts for as low as 30% and as high as 100% of total imports for selective auto companies under coverage.

- Who are exposed to what? Key beneficiaries from the weaker JPY are BAuto and Perodua (23% owned by MBM Resources and 38% owned by UMW). BAuto imports kits and CBUs almost entirely in JPY. Perodua too, imports entirely in JPY but given the already high localisation rate of its models, we estimate only circa 10% of total kit costs are imports.

- TCM is also a beneficiary of the weaker JPY but net impact is diluted compared to BAuto as JPY-denominated imports account for just an estimated 20%-30% of total imports. The bulk of TCM’s imports are denominated in USD. Its exposure to the JPY increased with the commencement of import of the Serena S-Hybrid CBU in FY13, followed by the CKD variant of the model this year. Meanwhile, UMW Toyota imports its kits and CBUs entirely in USD. It does not benefit from the weaker JPY and in fact, it could be negatively impacted by the stronger USD against the MYR in the near term.

- Sensitivity analysis: Every 1% change in the JPY impacts BAuto’s FY16F earnings by 2.4% and for MBM, by 0.6% (for FY15F). For UMW (at the group level) and TCM, the impact is 0.2% and 3.4% to bottomline, but every 1% change in USD impacts earnings by 2% and 9%, respectively. UMW and TCM are more sensitive to changes in the USD rates. TCM is a lot more sensitive to forex given its depressed earnings base currently, a risk factor we had highlighted in our sector downgrade recently.

- Forecasts tweaked to reflect new forex assumptions: We have adjusted our JPY assumptions for auto companies under our coverage to 3.05 for FY15F/16F, versus 3.15 previously. As a result, we have adjusted upwards BAuto’s earnings by 8.6/8.3% over FY16F/17F (YE Apr) and MBM by 3.3%/3.1% (for FY15F/16F). UMW’s earnings are adjusted down by 2.4/2.3% and TCM by 3.1%/3.7%, as we also adjust up our USD:MYR assumptions to MYR3.25:USD (from MYR3.20).

- BAuto’s FV is raised to RM4.00/share (from RM3.70/share) and MBM to RM3.30/share (from RM3.20/share). TCM’s FV is reduced to RM3.20/share (from RM3.30/share) and UMW to RM12.20/share (from RM12.40/share).

- BAuto is re-affirmed as our top pick for its:- (1) extensive exposure to the JPY, (2) biggest beneficiary of the EEV program over the next 12-24 months; (3) aggressive new model introductions driving strong 27% 3-year EPS CAGR; (4) resilient margins given its niche in higher-end segments; and (5) potential acquisitive growth. TCM remains our top SELL.

Source: AmeSecurities