We  are  upgrading  our  call  on  APM  to  NEUTRAL  (from  Sell)  with  an unchanged  MYR4.30  TP.  Since  last  November,  the  stock  has  retraced 14%  and  now  trades  at  P/Es  closer  to  the  industry  average  and  its  3-year  median  P/E  valuation.  We  believe  that  pedestrian  earnings growth  prospects  going  forward  are  already  baked  in,  with  the  share price likely supported by the 4.8% yield on offer.

Tepid growth outlook. APM Automotive (APM) management stated the company  is  experiencing  higher  costs  and  weaker  original  equipment manufacturer  (OEM)  demand  across  most  of  its  major  product segments,  offset  by  higher  exports  and  overseas  sales.  National  car makers’ market share losses over the years have also helped pressure revenues.  In  2014,  total  industry  production  (TIP)  contracted  1%  YoY, with  Proton’s/Perodua’s  YoY  production  declining  20.2%/13%  YoY respectively. Much of auto production capacity in Malaysia caters for the local  market,  with  few  manufacturers  exporting  regionally.  With  the domestic  market  already  relatively  saturated,  and  the  high  car  prices relative to incomes, auto sales only grew at a 2.4% CAGR in 2010-2014. The  Government’s aim  of  lowering  car  prices  by  30%  by  2017  without any  corresponding  reduction  in  automotive  tariffs,  has  stoked  industry competition. The mindset of car buyers have also changed and are now more  price  sensitive,  expecting  more  discounts  and  gifts. Correspondingly,  manufacturers  are,  in  turn,  pressuring  their  parts  and components suppliers to offer more competitive pricing.

National  Automotive  Policy  (NAP)  yet  to  gain  traction.  The  core objective  of  NAP  is  to  make  Malaysia  the  regional  automotive  hub  for energy-efficient vehicles (EEVs), so as to claw back the head start that Thailand  and  Indonesia  have  established.  However,  the “customised incentive” approach, absence of specifics and lack of long-term policies to  build  customer  acceptance  of  hybrid  vehicles,  are  seen  as  policy shortcomings.  There  have  been  few  major  commitments  by  global
OEMs  to  establish  new  auto manufacturing  facilities  in  here  in  the past year.  Last  week,  Mitsubishi  Motors  began  construction  of  a  new USD502m,  160,000  units/year  plant  in  Cikarang, West  Java,  which  will begin operations in April 2017.  

Upgrade  to  NEUTRAL.  Our  MYR4.30  TP  is  derived  from  9.0x  P/E,  in line with the 3-year median of 8.8x. We believe APM’s share price will be supported by the 4.8% yield and is already close to being fairly valued.

Pedestrian Growth But Yields Appeal 

Financial Exhibits

Financial Exhibits

SWOT Analysis

Company Profile

APM  Automotive  (APM)  is  a  member  of  the  Tan  Chong  Group  of  companies  and  is  a  leading  domestic  manufacturer  of  automotive parts and components.

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Source: RHB