Highlights & Comments

Domestic TIV to grow by 3.5% yoy in 2013, from low base year effect (Thailand flood effect in early 2012 and responsible lending guideline), new model launches, competitive pricings and aggressive OEMs campaigning.

Shifting domestic TIV market structure, lower market share by national OEMs, while continental OEMs fast gaining market share, driven by VW, BMW and Mercedes. Japanese OEMs are maintaining their market share.

DRB benefits from strong sales of VW (manufacturer and dealer), Mercedes (manufacturer) and Audi (distributor and dealer). MBM benefits as main dealer for VWand Volvo.

Emergence of Chinese OEMs with improved products and services. They are exploring opportunities for regional manufacturing plant in Malaysia.

MBM may take advantage of its manufacturing license to JV with Chinese OEMs. As the OEMs (i.e. GWM and Chery) set up assembly hub in Malaysia, DRB and MBM benefits from supplying autoparts and components.

Automotive companies are tapping into export or foreign markets. Both Proton (wholly owned by DRB) and Perodua (38% owned by UMW and 22.5% by MBM) are exploring opportunities on export markets.

VW has already set up a regional manufacturing hub (70% owned by DRB) for ASEAN. DRB is in talks with Audi on potential regional manufacturing JV in Malaysia.

DRB, MBM and UMW (only from Perodua) also benefits from supply autoparts and components, leveraging on growing production (sales) volumes of Proton (targeting 500k sales), Perodua (400k sales) and VW (60k sales).

TCM has exclusive Nissan distribution rights in Indochina (expected strong automotive demand) with a new manufacturing plant in Vietnam to support the strong growth in the region.

NAP revision to support the changing landscape, by encouraging EEV production hub (i.e. VW and GWM) and improving the efficiency of the domestic automotive supply chain, benefiting DRB and MBM as the larger players.

Risks

• Slowdown in the Malaysian economy.
• Announcement of immediate drastic cut in car prices.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.

Forecasts

Adjusted higher earnings for DRB (contribution of VW) and TCM (higher Nissan sales), lower earnings for UMW (lower Toyota sales) and MBM’s earnings remain unchanged.

Rating

Overweight

• Positives – 1) Potential export to ASEAN market, i.e. Malaysia as a hub; 2) Implementation of Energy Efficient Policy; and 3) Recovery of automotive supply chain.
• Negatives – 1) Instability of global automotive supply chain; and 2) Aggressive promotion to boost sales, affecting margins.

Valuation

• Maintained Overweight outlook on Automotive Sector with Top Picks: DRB (RM3.36) and MBM Resources (RM4.35). Downgrade UMW to Sell (RM11.80).

Source: Hong Leong Investment Bank Research - 02 Apr 2013