Highlights/ Comment

Aligning itself towards the national automotive policy, Perodua has embarked on a 5-year strategic transformation roadmap with budgeted RM3.5bn capex (internally funded) focusing on improving:

1) Products: Development of new models that suit market demand. The upcoming new model by 2H14 is expected to be EEV compliant, with fuel efficiency of >20km/liter vs. current models of 14-15km/liter;

2) R&D and Procurement: Close collaboration with Daihatsu and Mitsui to develop in-house expertise in new car development as well as with vendors. New R&D center and extended test track are being built and RM260m vendor development program to assist vendors to meet targeted cost, quality, and productivity. Daihatsu has also invested into AET transmission plant in Sendayan, Malaysia to support Perodua manufacturing (existing AET is imported from Japan);

3) Production: Increase production efficiency and lower DPU (defect per unit) to global standard. Perodua’s RM1.3bn new plant (capacity of 200k units vs. existing capacity of 250k units) is on track for operation by 2H14 equipped with latest technology by Daihatsu. The new plant is complete with 75% automation (vs. existing plant of 30%) and needs 1,200 workers for single shift (vs. existing plant of 6,500 workers for double shift); and

4) Customer Satisfaction: Improve product quality and reduce defects, with top notch sales and services experience to customers. Perodua is investing into new 3S flagship centers to provide a refreshed Perodua image and capture after-sales service market.

All Perodua staffs are trained under DOJO concept to exercise best practices, contributing to efficiency and lower defect rates.

We are amazed with the working culture in Perodua Manufacturing plant, while we believe that Perodua is likely to maintain its 30% market share of TIV, especially with the new EEV model. We do not discount the possibility of Perodua collaborating with Daihatsu for export market.

Management believes that MAI’s projected 1m TIV by 2020 is relatively hard, but achievable, given the right government policy and proper message to the people.

Direct beneficiaries of Perodua strategies include UMW (BUY; TP: RM12.55) and MBM (BUY; TP: RM4.52), while autoparts and components supplier include DRB (BUY; TP: RM3.30), APM (Not rated) and EPMB (Not rated).

Risks

1) Prolonged tightening of banks’ HP rules; 2) Slowdown in the Malaysian economy; 3) Global automotive supply chain disruption; 4) Sudden jump in fuel prices and interest rate; and 5) Depreciation of RM.

Rating

NEUTRAL

Positives: 1) Export to regional market, i.e. Malaysia as a hub; 2) Implementation of Energy Efficient Policy;

Negatives: 1) Implementation of responsible lending guideline; 2) Instability of global automotive supply chain.

Valuation

Positive to UMW (TP: RM12.55) and MBM (TP: RM4.52)

Source: Hong Leong Investment Bank Research - 16 Apr 2014