We recently visited UMW Toyota’s integrated manufacturing complex in Bukit Raja, Klang (currently producing Vios, Yaris and Corolla Cross). Since our last visit in 2019, it has scaled up its production efficiency to one vehicle per 9 hours, vs. 12 hours four years ago. We maintain our earnings forecasts, TP of RM5.00 and ACCEPT OFFER call.

We recently visited UMW Toyota’s integrated manufacturing complex which houses its: (i) main office, (ii) welding station, (iii) resin paint station, (iv) vehicles assembly station, (v) integrated quality hub (cater for both Bukit Raja and Shah Alam plant) as well as (vi) Toyota Boshoku UMW Sdn Bhd plant which is the manufacturer of seats, door trims, package trays and tool bags.

Production efficiency significantly improved since 2019. The Bukit Raja plant efficiency has significantly improved by 21% since our last visit in 2019. Its “takt time” (the rate at which a product is completed based on the orders/demand) has since been shortened to 4.5 minutes from 5.7 minutes, and still ahead of its Shah Alam plant which is at 7 minutes. Consequently, the plant is currently able to produce 1 car in 9 hours or 260 units/day simultaneously (capacity utilised at 120-130%), compared to 1 car in 12 hours or 190 units/day in 2019 (capacity utilised at 60%). UMW guided that the overcapacity incurred due to the addition of Toyota Corolla Cross in 2021 as well as the latest addition of all-new Vios in March 2023.

Note that, the Bukit Raja plant maximum capacity is at 50k units (2 shifts) with ready land bank for future expansion of up to 100k units, without incurring major capex. Bukit Raja plant is specifically designed to produce up to C-segment platform (Vios, Yaris and Corrola Cross) while the Shah Alam plant (32k units in capacity) is for commercial vehicles (Hilux, Fortuner, Innova and Hiace).

ESG-centric plant. The Bukit Raja plant (674,300 sq. m) is 2.4x bigger than the old Shah Alam plant, with ESG-centric features (refer to page 2). These includes: (i) ground-bolt machineries for easier, safer, and cheaper cost of expansion, (ii) flexible jigs that can assemble different car models in one manufacturing line, (iii) roof-top designed with natural light opening and solar-panel, (iv) zirconium coating paint (less wastewater and emission with 15-year no rust guarantee) with specifically-designed funnel to release clean and odourless air, and (v) welding shop line which at 45% automation level (vs. 0%at Shah Alam).

Initial investment for the Bukit Raja plant is at RM1.8b (includes land cost, construction, equipment and engineering support from Thailand and Japan) with depreciation cost at RM60m-RM70m/year for 30 years since January 2019.

Forecasts. Maintained.

We also maintain our TP of RM5.00 which is the MGO price offered by SIME.

We like UMW for: (i) the mass-market marques under its automotive business, i.e. Toyota and Perodua, but not without high-margin models such as Toyota Vios and Perodua Alza, (ii) the strong earnings visibility at its automotive business backed by order backlogs of >240k units of vehicles, and (iii) it being a reopening play, given the pick-up seen in its heavy and industrial equipment business and manufacturing of aero engine fan cases. However, we believe the MGO price is fair and hence maintain our ACCEPT OFFER call.

Risks to our call include: (i) failure of the proposed privatisation of UMW which could spark sell-down in its share price, (ii) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation, (iii) supply chain disruptions, (iv) escalating input costs, and (v) a global recession hurting demand for industrial/heavy equipment.

Source: Kenanga Research - 18 Sept 2023