DRB-HICOM; Buy; RM2.73
Price Target: RM3.45; DRB MK

DRB-HICOM (DRB) has officially launched the locally assembled VW Passat 1.8 TSI today, after being officiated by Prime Minister Datuk Seri Najib Razak yesterday. This is 8% cheaper (or RM14,000) at RM170,888 than the current CBU version of RM184,888. To date, about 300 CKD units have been assembled in Pekan, Pahang.

We had expected the CKD version to be cheaper but we think there is room to lower pricing with the shift  to use more local content for automotive parts. It was reported in the media today that VW AG and DRB are targeting to achieve 40% local content in the next 12 to 18 months which will be done in phases. Currently the CKD version is assembled using CKD packs from Germany and has likely minimal local content. DRB has assessed 27 vendors and 20 have met the requirements. We expect spillover to DRB given it has an extensive local autopart business.

While sales of the CBU VW Passat 1.8 TSI have been encouraging at 713 units since the launch in November 2011, the key growth driver will be to eventually export to ASEAN. It was reported that VW is looking at exporting to ASEAN by 2014. There will also be more VW models (Polo and Jetta) assembled out of Pekan by end-2011 or early 2012.

We maintain our BUY rating and TP of RM3.45 which is based on a 20% discount to SOP.

Source: HwangDBS Research 12 March 2012