We left UMW’s newly commenced Bukit Raja Plant on a more positive note, given that production is almost hitting the designed capacity of 50k units/year. Management guided that UMW can easily double the capacity with minimal incremental capex requirement. Note that BRP is a more efficient plant as compared to SAP. Furthermore, Toyota has been posting improving market share with a high of 12.3% in Jun 2019, driven by newly launched Vios and Yaris. We upgrade UMW to HOLD (from Sell), with higher TP: RM5.20 (from RM4.80), based on 10% discount to our revised SOP valuation to RM5.78, after accounting for Serendah land valuation at conservative RM30/sqf (vs. recent transaction of RM40/sqf).

ASSB BRP hitting designed capacity. UMW’s newly commenced ASSB Bukit Raja Plant (BRP) since Jan 2019 is already working on dual-shifts to achieve planned production of 3,800 units/month, indicating the plant is already reaching its designed capacity of 50,000 units/year. To note, BRP is designed specifically to cater for small size cars (for platform up to C segment) i.e. Vios and Yaris. Management guided the production capacity in BRP can be easily doubled to 100,000 units/year with minimal additional capex, as BRP has already allocated a vacant land area next to each production buildings for future expansion purpose.

A better BRP vs SAP. BRP is a more efficient plant with improved production quality as compared to SAP (Shah Alam Plant). Overall, BRP has an automation rate of 70% vs. SAP’s 30%. Comparing Vios production, BRP’s TAKT time (average time between the start of production of one unit and the start of production of the next unit) is currently 5.7 minutes and can be improved to 4.5 minutes (depending on demand requirement), as compare to SAP’s range of 5.9 to 11.9 minutes. The production quality rate has also improved considerably at 0.1 for BRP (based on shipping quality standard), vs 0.5 for SAP. Moreover, BRP is equipped with adjustable jigs to fit for different models, which will reduce jig costs over the longer time, as compared to SAP’s requirement of investing new set of jigs for each different model.

Improving Toyota market share. Toyota has been posting improving market share to a high of 12.3% in Jun 2019 since Aug 2018, driven mainly by increased demand for the newly launched Vios (Jan 2019) and Yaris (Apr 2019), while ASSB BRP continued to ramp up productions since operation commencement in Jan 2019. We understand that BRP is currently running at almost full capacity in Jul 2019, in order to meet the favourable demand for both Vios and Yaris.

Serendah land value. Recently, UMW has disposed a plot of Serendah land measuring 8.25 acres to MCE Holdings for a sum of RM14.4m, implying a value of RM1.75m/acre or RM40/sqf. To note, UMW owns 100% of 700 acres and 90% of 130 acres landbank size in Serendah, which the management has strategically identified for High Value Manufacturing (HVM) industry development and mixed development.

RM depreciation. RM has recently depreciated against USD as concerns arise on US-China trade tensions potentially evolving into a full blown trade war, while HLIB now expects BNM to cut OPR rate by 25 basis points by end 2019. The weakened RM outlook is negative towards UMW due to its imports in USD. Nevertheless, the increased localisation rate to 80% for the highly demanded Vios and Yaris has partially mitigated the negative impact of depreciating RM.

Forecast. Our forecasts remain unchanged at this juncture.

Upgrade to HOLD, TP: RM5.20. Since our last downgrade late Dec 2018, share price has already consolidated. We now upgrade our recommendation on UMW to HOLD (from Sell) with higher TP: RM5.20 (from RM4.80) based on 10% discount to SOP of RM5.78, after accounting for higher valuation of Serendah land. We believe UMW is fairly valued at current levels.

Source: Hong Leong Investment Bank Research - 6 Aug 2019