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A Good Year For The Auto Sector
Malaysia Perspective | 07 February 2011

By Mason Lim

The year 2010 ended on a positive note for the automotive sector, with Total Industry Volume (TIV) expected to be in the region of 590,000 when the results are announced in the not too distant future. The good news is expected to linger on into 2011 with TIV for 2011 expected to be in the region of 622,000 units, a 5.4% increase over the anticipated figures for 2010.

2011 is expected to see about 20 car launches of either all new models or upgrades hitting the Malaysian Market. Among the big launches this year would be the introduction of the all new Perodua MyVi, expected in the March-April period. The launch is significant as Perodua MyVi is Malaysia’s best selling car. Besides the Perodua MyVi, other significant launches expected this year include the Toyota Camry Completely Knocked Down (CKD) facelift, and an all new Honda Civic.

The revised NAP (National Automotive Policy) to allow 100% foreign ownership in the luxury car segment (above 1,800cc and priced above RM150,000), should encourage more foreign participation in the Malaysian market this year as indicated by the decision of Peugeot SA-France to place Malaysia as its assembly centre for its 207 sedan model. In addition to this, the announcement by Volkswagen to assemble in Malaysia for the local and ASEAN region would see the first batch out in late 2011.

Increased local assembly of CKD pact vehicles could potentially increase local content and hence local manufacturers’ competitiveness against global players. It is believed that the prices of CKD vehicles could be reduced arising from lower import duty on CKD vehicles and no duty for local component applications. However, the quantum of the decrease is likely to be smaller as manufacturers’ are keen to maintain the branding and image of the vehicle and utilise the additional margin to pay more incentives to dealers to boost sales. This should benefit names like APM Automotive (Fully Valued; TP RM4.60) and DRB-Hicom (BUY; TP RM3.55)

The increased local assembly of foreign cars in Malaysia should not create direct competition to national makes like Proton and Perodua which operates mainly in the segments below 1,800cc and are priced lower than RM150, 000. Non-national car leaders like Toyota and Honda are exposed to more competition for their below 1,800cc vehicles. Additionally, growing local assembly collaborations could potentially increase local auto parts applications (local content) and hence improve competitiveness against global manufacturers. Non-national marques that assemble locally may take the opportunity to benefit from the revised NAP which allows for higher level of statutory income exemption for exported goods with at least 30% and 50% value-added local content.

The top picks are UMW (BUY; TP RM8.90) for laggard play and potential re-rating from unlocking of value for its O&G division. The other beneficiary could be MBM Resources

(BUY; TP RM4.15) for its attractive valuation and potential expansion of its commercial segment.

Driving Ahead Into 2011

For 2011, several car makers are expected to grow by some 5%. They include Perodua, Proton, Honda and Nissan with Toyota expected to grow by some 6%. Several luxury makers are expected to perform better with between 7-10% growth for marques like Mazda, Volkswagen, Peugeot, Hyundai, and Mitsubishi. This is from demand for luxury and high performance automobiles as well as more attractive incentives offered such as extended warranty period offered by Volkswagen and Hyundai.

A significant factor for the growth of the automotive sector this year would be the finance element. Finance rates are expected to stay attractive this year despite analyst expectations of two 25 bps upward adjustment in the Malaysian overnight policy rate (OPR). Assuming a 50 bps hike, car financing rates could increase from around 2.8% p.a. to 3.3% p.a. for non-national cars. Based on a loan amount of RM80,000 over 9 years, monthly instalments will rise by RM33 from RM927.41. This rise however is minimal and not expected to affect car purchases.

It is also expected that demand for second-hand cars to be stable. This is based on the expectations of first time car buyers and status quo of the NAPs. Demand for second hand MyVi, Proton Saga and Toyota cars should be in greater demand. Accordingly, prices of second-hand cars should stay resilient and hence support second-hand cars’ trade-in values.

Proton-Perodua Merger : A Possible Re-Evaluation?

Last year, talk was rife that the government was looking at the merger between Proton and Perodua to streamline the operations of both companies and make them stronger to compete with global players. Frost & Sullivan was appointed to carry out a feasibility study on the possibility of this merger. This has been completed and a formal discussion between Proton and Perodua should be held in 1Q-2011. Perodua is keen for collaboration but not a merger as it would not benefit the company. As Perodua builds different types of cars compared to Proton, they would be unable to share the same platform. Hence, the merger would not result in cost efficiency benefits. It is reported that Perodua’s Japanese stakeholders, namely UMW and Daihatsu are also not keen on the merger.

A statement in the revised NAP mentioned that Proton should form a strategic partnership with a globally established OEM. This should be a partner that has the scale, brand and technology for Proton to leverage upon. The examples would be companies such as General Motor (GM) and Volkswagen (VW) as opposed to Perodua which is a local brand with limited export markets. Proton missed the opportunity of collaboration as talks with GM and VW fell through primarily because Malaysian negotiators were not ready to reach a compromise on management control by the foreigners. However, Proton is well-equipped with advanced manufacturing facilities, local and international networking and government support compared to other manufacturers and assemblers. It definitely has a solid platform to outperform other players this year.

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