We recently organised a meeting with the management of DreamEDGE, the Cyberjaya-based company leading the new national car project (NNCP) that was mooted by Prime Minister, Tun Mahathir. Its impact on the auto sector will likely be minimal in the near term, as we expect the rollout for the NNCP to only start in 2022.

What Is DreamEdge?

Incorporated since March 2007, DreamEDGE is an engineering services solution provider for various clients across industry verticals such as automotive, heavy industries, rail, electronics, energy, defence, precision equipment and tooling design. In terms of shareholding structure, CEO/Founder, Datuk Khairil owns an 82% stake in DreamEDGE, followed by VentureTECH SB with 10% and COO, Encik Azhan (remaining 8%).

What to Expect From the New National Car Project?

Post meeting, DreamEDGE clarified that the third national car project will likely be a B+ segment sedan car (neither a C-segment sedan nor a flying car), powered either by an internal combustion engine or a hybrid powertrain. We learned that the design concept and development of the car will be engineered by DreamEdge, while technology partner, Daihatsu is set to assist in the development of the powertrain and car platform. NNCP’s pricing is expected to be competitive, in our view, given that the high local content (c.90%) will benefit from incentives likely included in the upcoming National Automotive Policy 2019. Featuring the latest technology (ie. smart vehicle concept – car connectivity, smart vehicle system, Advanced Driver Assist System, etc), DreamEdge targets to sell at least 3k units/month of the car during its first year of sale. In 10M19, Proton and Perodua sold about 52.6k and 163.8k passenger cars, respectively.

Tight Timeline to Roll Out NNCP; Initial Capex of at Least RM600m

We believe DreamEDGE’s proposed timeline for the NNCP is tight, with plans to launch a model in production by 1H22. Nonetheless, management reaffirmed that a working NNCP prototype is on track for release by mid- 2020. On a more positive note, we are comforted to know that DreamEdge has received the blessing from Daihatsu’s participation; management is also currently in active discussions with several parties on funding (bulk will be privately-funded). Elsewhere, the estimated initial start-up cost (based on Daihatsu’s platform & powertrain) could require at least RM600m, but dealership network establishment and production related preparation costs could see cost overruns of up to RM1bn. In terms of production, we gather that the NNCP is to be built via contract manufacturing, which will likely utilise assembly plants with excess capacity. At our meeting, DreamEDGE reiterated that the NNCP would not be another re-badged Daihatsu.

Maintain NEUTRAL

All in, we remain NEUTRAL on the auto sector as we expect car sales to moderate on poorer consumer sentiment amid unfavourable economic conditions. For exposure, we like MBM Resources (MBM MK, RM3.69, BUY) for its appealing valuation. Key upside risk to our sector call: higherthan-expected car sales volumes; downside risks: 1) adverse fluctuations of the RM vs. the USD/JPY, and 2) delays on new car pricing approvals.

Source: Affin Hwang Research - 5 Dec 2019