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This article first appeared in The Edge Financial Daily on July 13, 2018

MBM Resources Bhd
(July 10, RM2.40)
Maintain buy with an unchanged target price of RM3.19:
To recap, Hino Motors established its first assembly plant in Malaysia, with 58% holdings, whilse MBM Resources Bhd holds a 42% stake. The plant was completed in 2014 in Sendayan, Negeri Sembilan and has a capacity of 10,000 units per annum.

 

The plant’s management noted that production volumes have steadily increased since 2014 from about 4,000 units to 5,000 units per annum currently. It also noted that demand for its trucks seems to be increasing. Furthermore, an on-site training centre for truck drivers has increased demand for Hino trucks, given that its competitors do not offer similar services. Nevertheless, the Hino plant’s utilisation rate stands at only 50%, and has plenty of room for increased production.

During a plant tour, management highlighted a couple of processes that are utilised only in Malaysia. This is mainly due to a lack of automation compared with Hino’s plant in Japan. Note that commercial vehicles only make up 10% of Malaysia’s total industry volume. Thus, investing in more advanced automation is unwarranted.  That said, management continues to implement processes such as modular building of parts outside the hood before installing it on the hood, using a lift instead of hoisting the truck’s frame and implementing a “no engine start rule” at the assembly line.  Besides increasing efficiency, the processes also promote safety at the assembly plant.

Management is pleased to note that it exported a number of trucks and buses to Thailand and Bangladesh recently.

We are positive about the venture into the export market as we believe that the plant may only achieve full capacity via increased export volume.

We understand that local content of Hino trucks is 10% to 15% currently. However, commercial vehicles do not attract heavy excise duties. Thus, there is no incentive to increase local content. Management noted that localisation will only be carried out if prices are competitive. Currently, the plant imports most of its parts directly from Japan. We understand that management is attempting to reduce cost by sourcing auto parts from Thailand and Indonesia.

Although MBM’s main business is expected to remain loss-making in the near term, its valuable associate stake in Perusahaan Otomobil Kedua Sdn Bhd should cushion any downside risk. — TA Securities, July 12

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