AUTO SECTOR Forex is a friend this new year, Dec TIV outperformance

- Forex is a friend: We re-affirm our OVERWEIGHT rating on the auto sector on the back of recent positive developments. Two key earnings catalysts in the near-term are:- (1) Weaker USD and JPY; (2) December sales volume likely to be one of the strongest in 2012, contrary to expectations of seasonal year-end weakness. The strengthening local currency against the USD and JPY serves to lower import cost for local car manufacturers. CKD kits account for 30%-35% of a manufacturer’s cost, of which between 10%- 70% comprises imported kits, depending on depth of localisation. The USD, which forms 80%-100% of a typical manufacturer’s imported kit cost, has seen its value depreciate by as much as 5.6% against the Ringgit to RM3.02:USD currently versus the peak of 3.2 in May 2012. Positively, the strong Ringgit trend seems to be sustaining well into 2013. YTD, the average exchange rate stands at RM3.04:USD (vs. 2012 average of RM3.1: USD).

- The Yen falls off a cliff: While the Japanese Yen forms a smaller portion of imported kit cost, it has seen its value depreciate by as much as 18% against the Ringgit (vs. peak rates seen in Jan 2012 through mid-2012). The JPY hit its lowest level in over 2 years yesterday, at 3.37sen:JPY. A key beneficiary of the depreciating JPY is Perodua. Perodua’s imports, estimated at 10%-15% of total kit costs, are mostly in JPY. TCM is another beneficiary, with 17% of imports in JPY. UMW Toyota imports mostly in USD.

- Earnings sensitivity: Our analysis suggests that TCM is most leveraged to forex exposure. While UMW Toyota also has the same exposure via Toyota, there is a dilutive impact on a group-wide basis, given UMW’s diverse business interest. Meanwhile, Perodua has achieved very high localisation, meaning much less exposure compared to Nissan’s and Toyota’s imported kit requirements. Every 1% depreciation of USD and JPY assumptions (collectively) impacts TCM’s (FY13F) pretax profit by 6%, UMW by 3% and Perodua by 1%. Given that auto manufacturers typically stock up 2-3 months forward, we expect to see meaningful earnings impact from the falling USD and JPY from 1Q13 onwards.

- December TIV may outperform strongly: Separately, our channel checks suggest that December TIV may strongly outperform expectations, as sales volume would have been artificially driven by aggressive discounting, particularly by Toyota and Honda. We estimate December TIV at 57-58K (+7% QoQ, +19% YoY), which will bring 2012 TIV to circa 624K units (+4% YoY), ahead of our earlier forecast of 607,625.The 2012 TIV will also outperform MAA’s forecast of 615K unit sales (2012). The December numbers translate into a 4Q12 TIV expansion of 5% QoQ and 10% YoY to 165,723 units. Coupled with favourable forex trends, we believe sector earnings may improve meaningfully both on sequential and YoY basis from 4Q12 onwards. 

- Our 2012 TIV projection has been adjusted higher to 624,128 units from 607,625 units, to factor in stronger- than-expected December 2012 TIV, which is expected to be reported later this week. We conservatively expect 2013 TIV to grow 2% to 636,610 units – which factors in upwards revisions to our projections for the Nissan Almera recently, but has yet to factor in contribution from the new Toyota Vios and Altis.

- TCM (BUY, FV: RM6.30/share) is our top pick for 1Q13: The stock is well positioned for a recovery – off a depressed valuation base of 9x, 83% earnings growth in FY13F and its status as an under-owned stock having underperformed the index over the past 2 years. Additionally, TCM is the best play into the strengthening Ringgit on top of potentially increased newsflows on contract manufacturing wins in the next 6 months – a follow-through from the group’s region-wide expansion that was kick-started via a trail of plant acquisitions in 2010.  APM (BUY, FV: RM6.30/share) is a beneficiary of volume expansion at TCM, being a key part supplier to the Tan Chong group.

Source: AmeSecurities