Highlights/ Comments

• UMW 51% subsidiary ASSB is the assembly plant for Toyota Malaysia. In the plant, the CKD models assembled are Vios, Camry, Innova, Fortuner, Hilux and Hiace. The localization rate is at 51% (based on value) and the management is targeting 60% by 2020, in line with government initiatives.

• Built on a land size of 12,920m2, the plant has a normal production capacity of 75,700 units p.a. (based on 2 shifts and 242 working days). Currently, the plant is 30% automated with direct staff headcounts of circa 2,100 (75% permanent and 25% contracted). With additional shifts and working days, the plant production capacity could go up to 90,000 units p.a. (limited by additional maintenance costs).

• Its owned available land area has been fully occupied with no space for further plant expansion. Management indicated the land (3-4,000m2) next to the plant is available for sale with indicated value of RM60m. Without substantial increase in projected demand, management is unlikely to acquire this land due to the high investment cost.

• Management continued to invest on improving the efficiency and automation of the production lines from time to time as the management sees fits on higher demand.

• For FY15, management has projected production of 74,783 units (down from initial 80k units). YTD-July, the plant has assembled 42,111 units.

• Based on Toyota Malaysia (UMW owned 51% subsidiary) sales target, management is targeting 90k units for FY15. YTD-June, it has achieved only 38,796 units, likely to fall behind its target.

• We expect Toyota earnings to be weak in 2015, as it is hit by higher cost structure (imports denominated in US$) and higher marketing expenses (sales being driven by high rebates of RM6-8k and freebies) culminating in weaker margins.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Appreciation of US$.
• Plunge in crude oil price and slowdown in O&G exploration.

Forecasts

• Unchanged.

Rating

SELL

Positives

• 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) Expanding reach of Manufacturing & Engineering division into fast growing China and India.

Negatives

• 1) Slump in crude oil prices affecting demand and charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; 3) Depreciation of MYR; and 4) Intense competition from rival automotive marques.

Valuation

• Maintained SELL with unchanged Target Price of RM9.44 based on SOP.

Source: Hong Leong Investment Bank Research - 6 Aug 2015