The much awaited revised National Automotive Policy (NAP) 2020 has finally been unveiled with the main objectives being to: (i) Develop Malaysia as a Regional Hub for the production the Next Generation Vehicles (NxGV), (ii) Expand the participation of domestic automotive industry in Mobility as a Service (MaaS) ecosystem, (iii) Ensure the domestic industry is equipped with Industrial Revolution (IR) 4.0, (iv) Ensure the overall ecosystem receives maximum benefit from the NxGV ecosystem, and (v) Reduce carbon emission from vehicles by 2025 in line with the ASEAN Fuel Economy Roadmap of 5.3 LGE/100km. While we laud the comprehensive policy which aims to further liberalise the sector, the policy unfortunately, lacked details on key issues including: (i) Customised incentives for CKD vehicles (to be unveiled later in stages in line with 7- National Roadmap for Automotive & Mobile Value Chain - NRAMVC), (ii) Tax incentives for hybrids, PHEVs, EVs (Electric Vehicles), (iii) New National Car Project (NNCP), and (iv) Non-national/foreign brand investment incentives. There was also no End-of-life vehicle (ELV) policy mentioned in the NAP. Maintain NEUTRAL with unchanged 2020 target of 612,000 (+1.3%) units as we view that the initiatives will take several years to come to fruition. Our sector top-pick is BAUTO (OP; TP: RM2.75) which offers a steady dividend yield of 8%. Our other preferred pick is MBMR (OP; TP: RM4.75) for its largest exposure to EEV vehicles with 800k units sold to-date.

Next Generation Legacy. In a nutshell, NAP 2020 consists of three directional thrusts and three strategies as well as seven roadmaps/blueprints to be implemented up to the year 2030 (in stages). The directions include a focus on Next Generation Vehicles (NxGVs), Mobility as a Service (MaaS) and Industry 4.0, and the plan will incorporate the development of Automated, Autonomous, Connected Vehicles (AACV), light weight material tech as well as hybrid, electric and fuel cell vehicles. The directional thrusts include Technology & Engineering, Investment, and market expansion, while the strategies include value chain development, human capital development, and safety, environment and consumerism. The Prime Minister noted that vehicle technology trends such as Electrification, Autonomous Driving, Internet of Things (loT), Cooperative- Intelligent Transportation System (C-ITS) and Artificial Intelligence (Al) in vehicles are critical development focus for today’s global carmakers that enhance vehicle safety as well as making the vehicle more intelligent and environmentally friendly. The new Malaysian Vehicle Project will be implemented in line with the future direction and strategies of the Malaysian automotive industry including fulfilling the National Automotive Vision.

Customised Incentives mechanism to be unveiled later. The customised incentives mechanism is set to continue (to be unveiled later in stages in line with 7- National Roadmap for Automotive & Mobile Value Chain - NRAMVC), and will be based on cost-benefit analysis of specific business proposals by investors. These customised incentives will be more comprehensive, and will encompass a broader scope to involve not just EEVs but NxGVs, critical components as well as testing centres. To recap, the Ministry of Finance (MoF) has earlier confirmed via a statement by MAA that there will be no increase in CKD vehicle prices for a period of one year until 31 December 2020. This was due to the transparent reporting of the open market value (OMV) as outlined in the Excise (Determination of Value of Locally Manufactured Goods for the Purpose of Levying Excise Duty) Regulations 2019 dated 31 December 2019. Nevertheless, we believe that any increase in CKD car prices will be gradual and depend on models and currency movements. Honda Malaysia for example, recently implemented 5-9% price increase for 2020 (City up RM4.6k, Jazz up RM5k, CR-V up RM12.7k) due to a review of customised incentives for its CKD vehicles (which we believe was due to a review in cost-benefit analysis), which is different from the earlier-announced revision of excise valuation regulations that were not expected to alter vehicle prices.

Malaysia aims to go further down the biodiesel path, with B30 biodiesel to come by the year 2025. This was revealed by the Prime Minister during the launch of the NAP 2020 where B20 is to replace the current B10 biodiesel at over 3,400 stations nationwide, except in the Cameron and Genting Highlands in Pahang and Kundasang in Sabah where B7 biodiesel will continue to be used. The blend consists of 20% palm methyl ester and 80% regular diesel for which the Implementation already started in Langkawi and Labuan last month. The B20 availability will be expanded in stages starting in Sarawak in April and Sabah in August, before eventually being rolled out across Peninsular Malaysia by June 2021. The government aims to encourage the use of domestic palm oil and stabilise its prices with the move, which is expected to increase the consumption of palm oil by 534,000 tonnes a year to around 1.3m tonnes/year which is expected to reduce the amount of greenhouse gases emitted by as much as 3.8m tonnes/year.

Overall. automakers are positive on the NAP with Perodua to benefit the most. Perodua, Malaysia’s first and largest EEV manufacturer with over 800,000 EEVs sold to date, has purchased a total of RM43.5bn worth of components from local suppliers, including RM5.4bn in 2019 and targeted to spend RM6bn for 2020. Whilst on autonomous technology, Perodua, guided by Daihatsu Motor Company of Japan, has laid the foundation with its Advanced Safety Assist (ASA) suite of driver assistance systems and have made it accessible to the masses. On the other hand, UMW believe that its Bukit Raja Plant is equipped with automation, skilled manpower and the capacity to align with the government’s vision of developing the domestic industry into Industry Revolution 4.0 (IR 4.0) with further investment to introduce more CKD hybrid cars in the future. And Proton, while lauding the government’s push for NxGV, has its ownership structure (50.1% DRB-Hicom, 49.9% Geely), to provide the leverage of its shareholders’ strengths and local ecosystem to access new tech via Geely.

Source: Kenanga Research - 24 Feb 2020