Post plant site visit, we are more positive that OMI Alloy is able to turn profitable by FY19 with improved production efficiency and higher production volume. Management is confident that partnership with Citic Dicastal will benefit in terms of technical expertise and improving production volume. Our forecast is unchanged, and we maintain BUY with unchanged TP of RM2.84.

Cooperation with Citic Dicastal. Management shared that MBMR has signed Cooperation Framework with Citic Dicastal in Nov 2017. Citic Dicastal is the largest alloy wheel producer based in China with production capacity of 57.7m units p.a. in 2017. The group command 45% of China market and 23% of global market (exporting to Europe, USA and India market for both Japanese brand and European brand).

In Europe, Citic Dicastal’s product has been slapped with anti-dumping measures with tariffs ranging 17.2% to 27.9%, starting May 2018 for 5 years. Therefore, Citic Dicastal will partner with OMI Alloy for OMI Alloy to become Citic Discastal export platform to EU market, in order to avoid the anti-dumping measures. In return, Dicastal will provide technical support to improve the production, process and quality of OMI Alloy. Management expects to begin alloy wheel supply for Citic Dicastal in the next 6 months. It was indicated that the demand from Citic Dicastal is circa 375k units p.a. (50% of current production capacity).

Focus is on volume. Following its strategic partnership with Citic Dicastal, management is tentatively looking to increase their production capacity from the current 750k units p.a. to 1m units p.a. in 2019. Management mentioned that they will incur c. RM12m to RM13m capex on new equipment and machinery for the capacity expansion.

In 2018 OMI Alloy is targeting to produce 419k units (Figure #1), comprising 70% to Perodua order and 30% to REM market. By 2019, following the partnership with Citic Dicastal, management projected that the volume to improve to c. 700k units (based on 55 to 60k units p.m) and thus achieving their turnaround target. In 2019, management is also targeting to supply for Proton and Honda.

Perodua orders. OMI Alloy is currently supplying for Bezza, Axia, Myvi standard variant and has secured contract to supply for the new Perodua SUV, which is slated to be launched by year end. OMI Alloy is supplying 100% for Myvi standard variant and 50% for the Perodua Axia. With the target supply of 15k units p.m. to the new Perodua SUV by Oct 2018, management is confident that production volume can go up to 45k units p.m. by end 2018.

Export market. Since 2014, OMI has been supplying to German market (ITP, WheelWorld, Autec and Gewe). Management shared that OMI Alloy has exported 57.4k units in 2017 vs. 29.4k units in 2016. OMI is working closely with Citic Dicastal to expand their export market to India and other parts of Europe.

Improved efficiency to reduce cost. With the active plans to reduce cost, management has managed to reduce rejection to 15% from 40% in early FY17. However, management reiterated that it would be expensive to further reduce the rejection rate as due to heavy capex involved for process automation purpose.

Potential turnaround in FY19. OMI continued to report losses mainly due to low operational scale and high inefficiency (rejection rate). However, management has managed to reduce its rejection rate with the support from Citic Dicastal in 1Q18 and expect production to ramp up in FY19 with new domestic OEM contracts and REM contracts (own clienteles and Citic Dicastal), which will potential turn OMI Alloy into a profitable entity in FY19.

Forecast. Unchanged.

Maintain BUY, TP: RM2.84. MBMR is expected to leverage on sustainable sales of Perodua in Malaysia (as well as opportunity for export market). Perodua has invested into major manufacturing facilities for engine (with Daihatsu) and transmission (with Akashi Kikai and Daihatsu) to improve its cost structures and support its long-term growth. Furthermore, OMI has started to show positive signs of turnaround in FY17. We maintain BUY on MBMR with unchanged TP of RM2.84 based on 20% discount to SOP.

Source: Hong Leong Investment Bank Research - 28 May 2018