Friday, 8 March 2013

Auto Sector - Localisation trend is increasing traction! OVERWEIGHT

- Mazda will be investing RM100mil to set up an assembly plant at Inokom’s complex in Kulim, Kedah. Inokom is majority-controlled by Sime Darby (51% stake), with co-owners Pesumal (14%), BCorp (15%), Hyundai Motor Company (15%) and Hyumal (5%). The Inokom plant mainly assembles BMW, Hyundai-Inokom and Jinbei Haise models, besides the Mazda 3.

- Mazda currently operates an assembly plant (shared capacity of 300K units/annum) in Thailand, via a 45% stake in Auto Alliance with the key partner being Ford (48% stake). The plant, however, manufactures the Mazda Fighter and Ford Ranger (4WD) for the local and export markets. Earlier reports had it that the 1st model to be produced here is the CX5 (SUV) which qualifies as an EEV given low emissions and efficient powertrain & drivetrain achieved by Mazda’s SkyActiv technology. Mazda is targeting up to 50% localisation, higher than the typical 30%-40% for nonnational models. The plant will be used as a regional hub for Mazda (usually after 2-3 years), but will start off with a production rate of 3,000 units/annum.

- More importantly, the trend for localisation is increasing traction – a trend we have been highlighting since early 2011 following the aggressive entry of Euro marques (VW and Peugeot) here. Recall that Honda’s latest CRV model (CKD model) is targeted to achieve 50% localisation, which is a lot higher than the typical 30%-40% localisation rate for current generation models (in the non-national segment). The increased localisation should gradually translate into lower car prices – as it allows OEMs to get around excise duties of 75%-105% (makes up the bulk of duties paid by OEMs and duties, in turn, account for up to 30%-40% of direct cost).

- More importantly, new OEMs setting up assembly here have announced using Malaysia as a regional hub (in particular for passenger cars). Local volume growth may not be as great as what it was in the past few decades (as vehicle penetration is already pretty high at c. 70%). However, the current income level in Malaysia is one of the most attractive in ASEAN, coupled with the size of the local passenger car market which is still pretty large relative to larger overall vehicle markets in Indonesia and Thailand. Incentives for EEV (and a clear definition of an EEV) in the upcoming NAP review should provide a clearer direction for foreign OEM investment in the country.

- Next OEMs in-line to start production here would be Mitsubishi, and potentially 2 Euro marques and one US marque. MAI (Malaysia Automotive Institute) has indicated that 4-5 OEMs are scheduled to set up operations here this year. Tan Chong (BUY, V: RM6.40/share) remains our top sector pick. It is well positioned to ride on the influx of foreign OEM investment (via contract assembly), riding on its robust network of plants and distribution in the region. Meanwhile, on the surface, auto parts players will benefit from this trend via:- (1) Expansion of customer base; (2) Increased revenue from deeper localisation; near-term earnings will be negatively impacted by downward selling price adjustments for national OEMs. MBM (BUY, FV: RM4.60/share) is also a play into this trend given its comprehensive car assembly license which has yet to be utilised.

No comments:

Post a Comment