• Incremental fixed cost may dampen near-term growth

• UMWT volume target lower than expected

• We trim our FY19F by 13% and introduce our FY20F earnings at RM557m (+27%yoy)

• Tactical downgrade to NEUTRAL, TP trimmed to RM6.15

Bukit Raja kickstarts with the new Vios. UMW’s new Bukit Raja (BR) plant commenced operations in Jan19 with the new Vios as the first model, to be followed by the Yaris in early-2Q19. BR entails 45% automation rate (vs. 0% at ASSB, based on welding shop automation), a capacity of 50K units on 1-shift and will produce UMWT’s passenger cars on the B and C platforms while the old Shah Alam plant (38K/annum capacity on 1-shift) will focus on larger models and commercial vehicles e.g. Hilux, Fortuner, Innova and Hiace. Capex of RM1.8b was invested into BR, inclusive of land, civil structure and equipments. We learnt that RM600m of the RM1.8b capex was funded by debt. Staff force was also transferred from the Shah Alam plant. Both plants now entail almost similar staff count.

Volume target more conservative than expected. In a recent briefing, UMW unveiled its FY19F UMW Toyota (UMWT) target volume of 75,000 units, representing a 14%yoy growth against FY18 volume of 65,551 units. The FY19F target however was below our earlier forecast of 80K units – primarily given lower volume forecast of the new Vios at 30K (FY19F) vs. our earlier expectation of up to 35K. UMWT aims to regain top position in the non-national segment (this would have to take it to circa 100K/annum volumes to match current non-national market leader, Honda), but is expected to take a couple of years.

High localisation rate for future models. The new Vios entails very high localisation rate of 80% vs. 58% for the previous generation Vios. This is one of the highest localisation achieved for a non-national Bsegment sedan. UMWT expects all future models at BR to be as highly localised. While the localisation achievement was better than expected, this in-line with our thesis of UMW catching up in the EEV bandwagon, having lagged behind key competitor, Honda on this front. We think UMWT is on the right track and we foresee structural improvements in market share going forward, notwithstanding near-term gestation on earnings growth.

Gestation expected. BR is already running at break-even capacity even with just the Vios being produced currently, and we forecast utilisation rate to hit 80%-90% in FY19F (on single-shift) with the Yaris included. However, manufacturing margins initially is unlikely to match the previous setup (Shah Alam used to run on 2-shift at an estimated 80% utilisation on annual basis) until volumes expand further given incremental fixed cost from BR. Our visit to BR yesterday suggests cash cost/unit at BR is lower than the Shah Alam plant. However, the Shah Alam plant is already fully depreciated (excluding model-specific dies and jigs), whereas fresh depreciation for BR will kick in from 1Q19, which we think will dampen earnings growth in the near-term, despite a 9.6%yoy FY19F TIV growth for UMWT.

Source: MIDF Research - 12 Mar 2019