We recently visited UMW Toyota’s new manufacturing plant at Bukit Raja Industrial Estate in Klang, Selangor. Both Bukit Raja plant (BRP) and Shah Alam plant (SAP) will have a combined capacity of 88k units per annum; BRP is expected to double up capacity in the long run, in hopes to reclaim the top spot for non-national brands in Malaysia. We expect the (i) better economies of scale, (ii) increased automation in BRP and (iii) greater localisation rates to improve auto margins. At 12.5x 2019E PER, valuations looks fair at this juncture. Maintain HOLD.

Bukit Raja Plant to Drive Production of Passenger Vehicles…

Built with a total investment value of RM1.8bn, the new BRP is part of Toyota’s plan to reorganise its manufacturing lines in Malaysia, focusing on driving production of passenger vehicles with an initial capacity of 50k units per annum. BRP plans to gradually fill up existing capacity with the two volume generative models – all-new Vios (launched in January 2019) and all-new Yaris (likely launch by April 2019). We gather that bookings for the Vios are encouraging; UMW Toyota targets to sell about 30k units in 2019. We do not rule out the possibility of a Complete Knocked-Down CHR in BRP, considering that the BRP platform could accommodate this model and most configurations of up to C segment vehicles (ie. Toyota Corolla). Further, BRP is able to double up its current capacity to 100k units per annum (from 50k units) if the demand for Toyota cars pick up locally. Meanwhile, production from SAP will be cut to a single shift, lowering production capacity of 76k units/annum to 38k units/annum, focusing on production of Toyota commercial vehicle, namely the Innova, Fortuner, Hilux and Hiace models. All in, the current combined capacity is about 88k units per annum (from 76k units per annum previously).

…and Embracing Automation in the Production Processes

We are impressed with the use of robotics in BRP - about 60% of the production processes (ie. spot welding and painting) are automated (no automation in SAP). Unfortunately, some processes like the assembly lines and inspection process continue to heavily rely on a human workforce. As such, there is less reliance in workforce (est. 10% of overall cost) in the overall auto operations as most workers were reshuffled between the two Toyota production plants, despite the increase in capacity.

High Localisation Rates to Lift Auto Margins

The Vios (possibly the Yaris too) is assembled with high local content of more than 80% (previously 50%), almost as high as Perodua’s localisation rates of 90%. The higher localisation rates will positively lead to a reduction of excise duties, as designated in the Industrial Linkage Programme, which will potentially lift margins moving forward.

Reiterate HOLD With Unchanged TP of RM5.90

We reiterate our HOLD call on UMWH with unchanged TP of RM5.90 (Fig 1). At 12.5x 2019E PER (close to the post O&G de-merger average PER of 14x), UMWH’s valuation looks fair. Key risks: (i) higher/lower-than expected vehicle sales, (ii) fluctuation in Ringgit against US$, (iii) intense competition and (iv) possible losses/impairment from non-core units.

Source: Affin Hwang Research - 12 Mar 2019