Inokom 2019 Plant Visit Highlights

We recently co-organised a 1-day visit to Inokom Corporation SB (56%-owned by Sime Darby/ 29%-owned by Bermaz Auto) and Sime Darby Engine’s (SDAE) assembly facility. Aspiring to be the preferred assembly partner in the ASEAN region, Inokom has increased the use of automation at its manufacturing process and plans to resolve the production bottleneck at its paint shop facility. However, recent activity at Inokom has moderated given weak automotive sales and a shift towards the local marques. In tandem, we lower our TP for Bermaz Auto to RM2.30 (from RM2.60; HOLD). Overall, we reaffirm our NEUTRAL stance on the auto sector.

Inokom Key Takeaways Are:

Following our previous Inokom visit, we sense that recent activity at Inokom plant has moderated and we suspect the delay in price approvals for the facelifted CX-5 turbo and all-new CX-8 could be the culprit. To improve efficiency and adopt the Industry 4.0 policy, Inokom has implemented more automation in the welding and painting application. Inokom’s stakeholders are planning to invest est.RM200m to build a new dipping plant and paint shop which could raise the existing capacity to 50k units/annum (from 30k units/annum).

SDAE, a Key Engine Assembly Facility for BMW/MINI

Since commencement in April-18, SDAE’s utilisation rate has improved to 84% based on its existing production capacity of 10k engines/annum. Post local engine installation, the average localisation rate for CKD BMW/MINI cars has improved to est.43% (from 38%). The higher local content (on higher customised incentives) and aggressive product offensive from BMW should gradually lift SDM’s margins moving forward.

Delay in Car Pricing Approvals Will Likely Hit Mazda Sales

Post the visit, we expect a weaker Mazda domestic sales volume in the coming quarter as key models like CX-5 and CX-8 are still experiencing delays in price approval from authorities. In the long run, we believe the group’s SUV niche may face greater competition from the national marques. Considering these headwinds, we lower our FY20-22E EPS by 8-12% and TP to RM2.30 (from RM2.60) for Bermaz Auto. Reaffirm HOLD.

Maintain NEUTRAL

We retain our 2019 TIV forecasts of 596k units (-0.5% yoy), anticipating softer sales volumes in 4Q19. For exposure, we like MBM Resources for its appealing valuation. Key risks include: 1) higher-/lower-than-expected car sales volumes, 2) intensifying/less price competition; 3) fluctuations in the RM vs. US$/JPY and 4) delays on new car pricing app

Source: Affin Hwang Research - 7 Nov 2019