We recently visited the new Toyota Bukit Raja plant (BRP) with other 16 sell-side analysts. We are feeling positive on its long-term growth with the cost-efficient plant, albeit incurring depreciation starting 1Q19, and its 2-year gestation period. The new BRP break-even point is 30k units from the current capacity of 50k units mainly from all-new Toyota Vios, with higher localisation rate at 80%. No changes to our FY19-20E CNPs. Maintain MP with a TP of RM5.80.

Shifting to higher local content. The new BRP which started production in January 2019 is only for passenger vehicles (Vios, Yaris) and the old Shah Alam plant (SAP) is to produce solely commercial vehicles (Hiace, Hilux, Innova, Fortuner). The new BRP plant set-up can only efficiently produce B and C-Segment platforms (up to Corolla and C-HR models). We understand that excluding the new plant’s depreciation cost (estimated at RM60-70m/year, for 30 years) starting 1Q19, the cost/unit vehicles production is much lower compared to the old SAP. Furthermore, the localisation rate for the all-new Vios is higher at 80% (by value), compared to previous generation at c.50%, largely from the 40% local content in body platform (60% from Thailand), engine (Daihatsu Perodua Engine Manufacturing plant, MyVi and Aruz shared similar 2NR-VE engines) and seats from Toyota Boshoku UMW (located within the BRP compound). The upcoming all-new Yaris is expected to reach the same 80% localisation rate. Nevertheless, any cost savings from the current capacity rate, will be netted-off by start-up costs for the next 2 years.

Cost-efficient Plant. The new energy-efficient Bukit Raja plant (674,300 sq. m) is 2.6x bigger than the old Shah Alam plant, with the following features:- (i) welding shop line at 45% of automation level (vs. 0% at SAP), (ii) 1-shift higher capacity level at 50k units/annum, compared to SAP at 38k units, (iii) solar-powered equipment (currently, on weekend operation only), and (iv) the first Asia’s zirconium coating paint centre (1 spray booth, SAP-2 spray booth, 15-year no rust guarantee). This reduced the TAKT time (maximum acceptable time to meet the demands of the customer) for BRP to 5.7 minutes compared to SAP at 7 minutes, with the ability to further shorten the TAKT time based on demand. BRP is currently able to produce 1 car in 12 hours or 190 units/day simultaneously.

Expansion at lower cost. The new BRP is expandable to 100k units capacity, on 2-shift operation with ready land bank for future expansion, without incurring major CAPEX. The new BRP is designed with ground base machineries (no hanging machine from the ceiling) for easier, safer, cheaper cost of expansion. Note that, the previous capex for the construction of BRP is at RM1.8b funded by internal cash and RM0.6b in borrowings (includes land cost, construction, equipment and engineering support from Thailand and Japan). The new BRP is expected to reach its break-even point only on demand from all-new Toyota Vios at 30k units (60% utilisation rate) this year.

Outlook. UMW Toyota is targeting a better year for 2019 at 75k units (+15%) for Toyota and Lexus models. On 24th January 2019, UMW launched the all-new Toyota Vios (RM78-88k) and will be launching two new models, the Toyota Yaris (by 2Q19) and A90 Toyota GR Supra (CBU by 2H19). Elsewhere, 38%-owned Perodua is targeting higher 2019 sales of 231k (+1.7%), from the all-new ARUZ and MyVi. For Equipment division, the group will continue to leverage on its partners (KOMATSU & TICO)’ strengths, while UMW Aerospace, under the M&E segment, is expected to reach the break-even level in FY20.

Maintain MARKET PERFORM with an unchanged Target Price of RM5.80 based on 17x FY19E EPS, which is the 5-year historical mean PER. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 13 Mar 2019