Automotive - More Autoparts Jobs

THE BUZZ

News reports said today Honda will undergo a major capex drive, investing RM1bn over the next three years to build a new production line and improve its infrastructure and dealers network. Of the RM1bn, about RM350m will be spent on a second production line at its plant in Melaka to double capacity to 100,000 units a year. Another report, citing company sources, stated that Volkswagen AG has renewed interest in buying a stake in national carmaker Proton Holdings Bhd.

OUR TAKE

Diverting operations to Malaysia. The RM1bn capex drive by Honda Malaysia has been anticipated, considering that Honda Motor Corp took a big hit last year when its production line in Thailand was damaged by last year’s floods, resulting in a production halt across the ASEAN region that lasted several months. We have heard from autoparts makers that Honda Motor Corp may shift its production line to Malaysia to mitigate the risk of future production disruptions in Thailand. The capex drive over the next three years will be for another production line for the assembly of the CKD Jazz Hybrid and capacity expansion for the production of the Honda City. At the initial stage, Honda will assemble the Honda Jazz Hybrid at its existing line till the end of the year. Production will then shift to the second line as soon as it is ready in the fourth quarter of next year. The second line will also produce the popular Honda City. The investment will also allow Honda Malaysia to mass manufacture hybrid vehicles, making it the first automotive manufacturer to produce hybrid vehicles in Malaysia. This move may make Honda eligible for a 100% fiscal deduction based on either Pioneer Status (PS) or Investment Tax Allowance (ITA), to be granted for 10 and five years respectively.

More jobs for autoparts makers. Honda’s massive expansion bodes well for the local autoparts makers in terms of beefing up their order books. We think Ingress Corp (NOT RATED) will be a major beneficiary, noting that the company has been winning jobs from Honda in Malaysia, Thailand and Indonesia. APM (NOT RATED), MBM (BUY, FV: RM4.57) and Delloyd Ventures (NEUTRAL, FV RM3.88) are also potential beneficiaries of the bigger number of jobs created by higher production volume from Honda.

VW still keen on Proton? We also do not find it surprising that VW is still keen to acquire a stake in Proton, given that it already has an existing partnership with parent company, DRB-HICOM. We think it is highly likely that VW will take up some form of strategic ownership in Proton sometime next year, in an attempt to make the latter its production hub for the ASEAN region. However, an outright acquisition of all of Proton is highly unlikely, as Proton is, after all, a national automaker. Note that when DRB-HICOM took over Proton, one condition stipulated that should DRB-HICOM receive another offer for Proton from other bidders within a year of the completion date, written consent must be obtained from Khazanah. In such an event, DRB-HICOM will have to pay Khazanah the difference between the offer and the acquisition price. 

Maintain NEUTRAL. We maintain NEUTRAL on autos given that half of our coverage are HOLD calls but we remains bullish on UMW (BUY, FV: RM10.46) and MBM (BUY, FV: RM4.58) which are our top picks in the auto space.

Source: OSK