Highlights/ Comments

• UMW Toyota (51% owned by UMW) is reported to plan to build a new assembly plant in Shah Alam with a budget of RM1.1bn to cater to future demand in Malaysia.

• The plant would produce small cars with initial capacity of 50,000 units per annum (able to double up to 100,000 units per annum) complementing its existing plant in Shah Alam with capacity of 90,000 units per annum. The new plant is slated to come online as early as 2018.

• Overall we are positive on UMW’s strategic move in building up capacity for growth, given its current plant in Shah Alam has already reached 80-90% utilization rate, limiting Toyota’s ability for further growth as well as the prospect of further improving cost efficiency (an old plant established back in 1968).

• We believe the investment will be entitled for the incentives scheme under the new NAP 2014 (National Automotive Policy), for its new investment into small cars (likely to be categorized as Energy Efficient Vehicle). Hence, Toyota will benefit from lower cost structure in terms of improved production efficiency in the new plant as well as incentives from the government.

• Furthermore, Toyota may be able to increase its products offer (especially on the CKD models) in the market. Toyota sales has been deteriorating for the past year as the market structure has shifted (due to changing demography, purchasing power and consumer preference) towards small car market mainly A – B segment cars. Toyota would need to re-strategize in offering more CKD models for small size car to cater to the market shift.

• Toyota may face higher startup costs in the initial period (gestation period), given the huge investments involved, while the market continues to face slow volume growth.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Global automotive supply chain disruption.
• Appreciation of US$.
• Plunge in crude oil price and slowdown in O&G exploration.

Forecasts

• Unchanged.

Rating

SELL

Positives

• 1) Control largest market share of Malaysia TIV with leading brand - Toyota, Lexus and Perodua; and 2) Investing into new business segment.

Negatives

• 1) Slump in crude oil prices affecting demand and charter rates for jack-up rigs; 2) Tightening of bank’s lending rules; and 3) Intense competition from rival automotive marques.

Valuation

• Maintained SELL with unchanged Target Price of RM5.50 based on SOP. We acknowledge the risk of further earnings downgrades given the expected earnings disappointment in upcoming 1Q16 result.

Source: Hong Leong Investment Bank Research - 18 May 2016