Inokom Plant Visit Highlights

We recently organised a 1-day visit to Inokom Corporation SB (56%- owned by Sime Darby / 29%-owned by Bermaz) and Sime Darby’s new BMW engine assembly plant. Established in 1992, Inokom is a contract assembler of vehicles for BMW / MINI, Mazda and Hyundai, serving the domestic and export markets in ASEAN. Key takeaways are highlighted below.

Contrary to Popular Belief, Car Production Is Not Slowing Down

We were pleasantly surprised that activity at the Kulim plant has not slowed down even after the reintroduction of the sales & service tax (SST) effective 1 September. This differs from the street view which expects car sales volume to decline sharply in September with the end of the tax holiday, despite a reduction in car prices by 1-3% (vs. GST-era) for certain car marques. Inokom’s management expects production volume to remain healthy until 1H19 on the back of exciting new model line-ups and continued consumer spending moving forward.

Labour-intensive Operations; No Plan to Further Automate, for Now

Inokom is heavily reliant on labour across the entire vehicle production. The company is not considering further automation at this juncture, considering the high investment costs and low production volume. Inokom employees are mostly locals, and hence, the company does not face any foreign worker-related issues. Elsewhere, we believe the higher minimum wages will have minimal impact on Inokom, as current compensation exceeds minimum wages.

A Giant Leap With BMW Engine Assembly

Besides the assembly of BMW / Mini vehicles, BMW Group Malaysia and Sime Darby Motors (SDM)’s 100%-owned subsidiary, Sime Darby Auto Engineering (SDAE) recently built a RM132m dedicated facility for the assembly of BMW engines for local demand, with opportunities to assemble other BMW engine types and expand to other markets. SDAE/Inokom’s BMW engine assembly facility is the first third-party contract assembly facility (BMW’s other engine production facilities are in China, India and Thailand) to support BMW’s growing demand in the engine assembly technology; a strong testament to the good working relationship between BMW and Sime Darby. At the current production capacity of 10k engines/annum, Sime Darby believes operations could break even after about 3 years (2017 local BMW sales volume was 11.6k units). We believe the locally assembled engines will lead to greater localisation, which could potentially help to reduce BMW car prices.

Maintain OVERWEIGHT

We retain our 2018 TIV forecast of 582.4k units (+1% yoy), as we expect softer sales volume moving in 4Q18 on car-pricing uncertainties stemming from the implementation of SST. For sector exposure, we favour auto players with growing market share: BMW (SIME MK, BUY), Mazda (BAUTO MK, BUY) and Perodua (MBM MK, BUY).

Source: Affin Hwang Research - 26 Sept 2018