The much awaited revised National Automotive Policy (NAP) 2014 has finally been unveiled with main objectives being: (i) promoting a competitive and sustainable domestic automotive industry, including the national automotive companies, (ii) making Malaysia the regional automotive hub in energy-efficient vehicles (EEV), (iii) promoting increase in value-added activities in a sustainable manner, (iv) promoting increase in exports of vehicles and automotive components, (v) promoting participation of Bumiputera companies in the total value chain of the domestic automotive industry, and (vi) safeguarding consumers’ interest by offering safer and better quality products at competitive prices. While we lauded the comprehensive policy which aims to further liberalise the sector and resolve the structural issues, we expect the impact to be MILDLY POSITIVE to the non-national car manufacturers given their EEVs technology know-how, which allows them to enjoy incentives for CKD production in Malaysia. All in, we are still expecting a challenging operating landscape given the high penetration rate and maturity of the market. We maintain our NEUTRAL rating for the sector as we view that the initiatives will take several years to come to fruition. TCHONG remains as our only BUY stock as we like: (i) its potential NP growth averaging c.53% p.a. in FY13E and FY14E, (ii) the strong Nissan franchise expansion, and (iii) its long-term regional growth story.

Comprehensive mix of customised incentives for Energy Efficient Vehicle (EEV). As expected, a comprehensive mix of customised incentives for both FDI and DDI such as Pioneer Status, Investment Tax Allowance, Grants for R&D and training, infrastructure facilitation and expatriates have been included in the policy. Meanwhile on the duty exemptions, it was spotted on to our expectations that the exemption of excise duties and import taxes for CKD EEV will be extended (CKD Hybrids and CKD EV duties and taxes exemption to be extended until 31 Dec 2015 and 31 Dec 2017). Having said that, this will immediately benefit DRBHCOM as its Honda Jazz is the only hybrid vehicle assembled locally. In terms of investment, it was mentioned that the manufacturing license would be issued for EEVs for all-segment vehicles. On that, we are expecting UMW (to produce Camry Hybrid CKD) and TCHONG (to produce Serena Hybrid CKD) to start producing EEVs at their respective plants. This could buffer the impact on the potential weaker sales for its respective CBU hybrid vehicles (which is at c.6% of total car units for UMW and c.5% of total car units for TCHONG) given the non-extension of the CBU Hybrid duty exemptions.

Ensuring roadworthiness through the Voluntary Vehicle Inspection (VVI). While we understand that the government is not enforcing the End-of-Life Vehicle (ELV) policy, VVI policy (for vehicles aged more than five years) has been created to enhance the awareness of Malaysians on the need to ensure car roadworthiness and safety of drivers. The voluntary vehicle policy, we gathered, is not limited to just one agency or company (this means that it is not only limited to Puspakom) in order to ensure competitive inspection rates. In the case for Puspakom, a unit of DRBHCOM, we foresee more competitors to enter the vehicle inspection business.

Lower car prices by 20%-30% going forward. In the policy, MITI has developed a framework namely Car Price Reduction Framework (CPR) for gradual car price reduction (between 20%-30%) in the next 5 years. Delving deeper, CPR consists of mix measures touching base on: (i) import duties reduction (through Malaysia Australia Free Trade Agreement and Malaysia Japan Economic Partnership Agreement), (ii) tax exemption of excise duties and import taxes for CKD hybrid and CKD EV, and (iii) lower excise duties through value added activities (higher localization under the industrial linkage programme). While there is no revision on the excise duties, the government noted that it is open to the possibility of reducing taxes when the fiscal situation permits. Meanwhile on the sales tax front, we understand that minimal car prices reduction could also be achieved through the replacement of sales tax (10%) with GST (6%).

Higher operational efficiency and effectiveness to increase the competitiveness of local automotive industry. This would be done through the enhancement for the supply-chain components and spare parts development. It is noted in the policy that soft loans amounting to RM765m and RM295m respectively have been set aside for the period of 2014 to 2020 to facilitate the growth of local Tool, Dies & Mould and to enhance vendor competitiveness through automation, consolidation, JV, technical cooperation and others. With that, we believe this would further promote the production scale for the localization content in the industry.

Other key points. On the issue of termination of open Approved Permits (AP) by 31 Dec 2015 and Franchise AP by 31 Dec 2020 mentioned in the NAP 2009, the government has decided to undertake an in-depth study to assess the impact of this termination on Bumiputera participation in the automotive industry. We do not discount the possibility of the extension for the termination of open AP in 2015.

Still NEUTRAL on the sector. While we lauded the comprehensive policy which aims to further liberalise the sector and resolves the structural issues, we expect the impact to be MILDLY POSITIVE to the non-national car manufacturers given their EEVs technology knowhow which allows them to enjoy incentives for CKD production. All in, we are still expecting a challenging operating landscape given the high penetration rate and maturity of the market. We maintain our NEUTRAL rating for the sector as we view that the initiatives will take several years to come to fruition. TCHONG remains as our only BUY stock as we like: (i) its potential NP growth averaging c.53% p.a. in FY13E and FY14E, (ii) the strong Nissan franchise expansion, and (iii) its long-term regional growth story.

Source: Kenanga