• FV of MYR3.49, 82% upside. We believe MCE Holdings’ turnaround performance can be sustained, supported by the implementation of the National Automotive Policy (NAP) 2020, localisation of auto content, growing market share of the national marques, and new export customers. Furthermore, its current demanding valuation of 7x is slated for a re-rating, with earnings quality, structural growth in automotive electronic components, expansion plans, and exposure to the EV space.

• NAP 2020 beneficiary. Launched in Feb 2020, the NAP 2020 brought three additional pillars – next-generation vehicle (NxGV), Mobility-as-a-Service (MaaS), and Industry Revolution 4.0 (IR4.0) – while continuing the core thrusts of NAP 2014, whose focus was on the development of energy efficient vehicles (EEVs). Importantly, NAP 2020 included the objective to make Malaysia a regional hub for auto production, focusing on the domestic supply chain development that would propel local players with the production know-how, technical expertise, and capacities, like MCE.

• The re-emergence of national marques a boon. Given that Perodua and Proton currently make up >80% of MCE's revenue, the continued popularity and gradually growing market share of the national marques benefits MCE. The local marques' continued push for greater localisation of their content and increasing electronic components per vehicle should benefit the company, given its vertical integration capabilities, which cover everything from design to the manufacturing of plastic and electronic components.

• Structural growth. Apart from total production volume (TPV) growth, electronic parts and components in automobiles are also set to grow exponentially in the next decade, driven by various monitoring and safety systems, infotainment, on-board computers, etc. As highlighted in NAP 2020, automotive parts and components exports are set to reach MYR28.3bn (2018: MYR13bn) by 2030.

• EEV the next growth engine. One of NAP 2020’s objectives was to develop an NxGV tech ecosystem to make Malaysia a regional hub for the production of such vehicles. In this regards, the fast-growing EV segment is gaining its popularity due to various government incentives and more affordable prices. MCE is tapping into the EV space – it holds a Manufacture License and World Manufacturer Identifier (WMI) code to assemble e- motorcycles locally. It has also won a contract to produce the low frequency (LF) antennas for electric motorcycles’ smart key systems in Indonesia.

• Undemanding valuation. Our FV is derived from a 12x FY24F (Jul) P/E, which is a huge discount to MCE’s automotive lighting business and electronics manufacturing services (EMS) peers given the smaller market cap and liquidity issues. Earnings are set to grow at a 3-year CAGR of 41% for FY22-25 due to the growing electronic components demand, new projects, and market share gains on top of the exposure to the EV space and expansion plan in Serendah to double the existing floor space.

• Key risks: Significant dependence on major customers, labour shortages, FX, and escalation of input costs.

Source: RHB Research - 16 May 2023