The Ministry of International Trade and Industry (MITI) announced that there will be no limit (quota) to the number of Approved Permits (AP) to be released over the year under the new open AP policy effective from Jan 2019. We think this development should not pose a serious threat to the domestic automotive market as we expect the increase in APs to remain confined to the luxury vehicle segment. Near-term applications will likely be postponed to incorporate the National Automotive Policy (NAP) 2019 review essentials which is due to be completed by 1H2019, we believe. Future approvals will also be properly enforced to ensure the Bumiputera privilege will not be abused moving forward. Maintain Overweight.

Evaluation Process More Stringent Despite the Limitless AP Quota

Introduced in the mid-1970s, the open AP is an import license granted (under the Customs Act 1967) to qualified Bumiputera companies to import reconditioned vehicles for sale in the domestic market. To qualify as an open AP holder, the company must be:- (i) 100% owned Bumiputera (applies to key management roles), (ii) has at least two years’ experience in the automotive business, and (iii) a strong financial position. About 164 holders (128 existing; 36 new) from the 300 applications received over May 2016 to June 2016 were approved by MITI. We understand that the revised evaluation process from MITI will be more stringent, also including an audit by a qualified independent auditor. Should this approval process be properly enforced, we believe it will be tougher for Bumiputera entrepreneurs to qualify for AP entitlements despite the limitless AP quota.

Minimal Impact to Sector; More Updates From NAP 2019 Review

In the near term, we think this development should not pose a serious threat to the domestic automotive market considering only 36 new companies were granted the approval. Per press release information, these new companies are still not fully operational as they are required to fulfil certain technical requirements. We believe that there will be unlikely any offer for new AP application at this juncture because the policy (no plans for abolishment) is still under thorough review under the NAP 2019 to ensure that entitlements are not abused moving forward. To recap, the AP system was supposed to be terminated by end of 2015 under the NAP 2009.

Source: Affin Hwang Research - 15 Mar 2019