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This article first appeared in The Edge Financial Daily on November 8, 2019

Auto and auto parts sector
Maintain neutral:
We recently co-organised a one-day visit to Inokom Corp Sdn Bhd (56%-owned by Sime Darby/29%-owned by Bermaz Auto Bhd [BAuto]) and Sime Darby Auto Engine’s (SDAE) assembly facility. Aspiring to be the preferred assembly partner in the Asean region, Inokom has increased the use of automation in its manufacturing process and plans to resolve the production bottleneck at its paint shop facility. However, Inokom’s activity has moderated recently given weak automotive sales and a shift towards local marques. We lower our target price for BAuto to RM2.30 (from RM2.60; “hold”). Overall, we reaffirm our “neutral” stance on the auto sector.

To improve efficiency and adopt the Industry 4.0 policy, Inokom has implemented more automation in the welding and painting application. Its stakeholders are planning to invest an estimated RM200 million to build a new dipping plant and paint shop which could raise the existing capacity to 50,000 units per annum (from 30,000 units per annum).

Since commencement in April 2018, SDAE’s utilisation rate has improved to 84% based on its existing production capacity of 10,000 engines per annum. Post local engine installation, the average localisation rate of completely knocked-down BMW/MINI cars has improved to an estimated 43% (from 38%). Higher local content (on higher customised incentives) and BMW’s aggressive product offensive should gradually lift Sime Darby Motors’ margins moving forward.

For the coming quarter, we expect weaker Mazda domestic sales volume as key models like CX-5 and CX-8 are still experiencing delays in price approvals by the authorities. In the long run, we believe, the group’s sport utility vehicle niche may face greater competition from national marques. Considering these headwinds, we lower our financial year 2020 (FY20)-FY22 earnings per share estimates by 8%-12% for BAuto.

We retain our 2019 total industry volume (TIV) forecast of 596,000 units (-0.5% year-on-year), anticipating softer sales volume in the fourth quarter of 2019. For exposure, we like MBM Resources Bhd for its appealing valuation. Key risks include: i) higher-/lower-than-expected car sales volume; ii) intensifying/less price competition; iii) fluctuations in the exchange rates of the ringgit against the US dollar and the Japanese yen; and iv) delays in new car pricing approvals. — Affin Hwang Capital, Nov 7

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