Highlights/ Comments

As we have highlighted, the revised NAP (National Automotive Policy) 2014’s main focus is on development of regional production hub for EEV (Energy Efficient Vehicle) in Malaysia. EEV is defined to include ICEs (internal combustion engines), which are fuel efficient and low carbon emission (pending availability of Euro 4 fuel).

NAP will issue new manufacturing licenses (as well as other incentives) to encourage foreign OEMs to set up EEV manufacturing facilities in Malaysia. Hence, the automotive parts and component manufacturers (DRB, MBM, APM, EPMB) will benefit from higher localization and increased production volume. The supply chain will also receive supports and loans from government.

EEV manufacturers (national and foreign OEMS), which are targeting export markets will also be given export facilitations and soft loans by the government.

ELV (End of Life Vehicle) will be implemented gradually, on voluntary basis at the initial stage. Government is also studying the possibility of RM5k cash coupons to incentivize voluntary vehicle scrapping, which will benefit national car i.e. Proton (DRB) and Perodua (UMW & MBM).

NAP will continue to support and assist the national car i.e. Proton (DRB) and Perodua (UMW & MBM) and motorcycle i.e. Modenas (DRB) with regards to transformation to improve productivity, quality, cost structure and market expansion (export).

As for the targeted gradual car price reduction of 20-30% by end of 2018, NAP will focus on: 1) increasing localization rate (reduce effective tax rate through industrial linkage program); 2) implementation of 6% GST by April 2015 (replacing current 10% sales tax); and 3) series of measure to cut cost, improve quality and gain productivity.

On Approved Permits (AP) issue, the government has decided to carry out in-depth study on its impact, suggesting further delay of the termination of open AP by 31 Dec 2015 and Franchise AP by 31 Dec 2020.

Major Beneficiary:

1. DRB (TP: RM3.38): Proton, VW, Honda, Modenas, Puspakom and automotive supply chain; and

2. MBM (TP: RM4.52): Perodua and automotive supply chain.

Risks

• Slowdown in the Malaysian economy.
• Global automotive supply chain disruption.
• Increase cost of living, impacting consumer confidence.
• Sudden jump in fuel prices and interest rate.

Rating

Neutral

Positives – 1) Potential export to regional market, i.e. Malaysia as a hub; 2) Implementation of Energy Efficient Policy; and 3) Implementation of Annual Car Check Policy.

Negatives – 1) Tightening of bank lending rules and rise in inflation; 2) Instability of global automotive supply chain; and 3) Depreciation of RM.

Valuation

Top Pick: DRB (TP: RM3.38) and MBM (TP: RM4.52).

Source:Hong Leong Investment Bank Research - 21 Jan 2014