Less complex China-sourced auto parts could be substituted

This article first appeared in The Edge Financial Daily, on February 7, 2020.
Less complex China-sourced auto parts could be substituted
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Automotive sector
Maintain neutral:
Hyundai Motor Company has announced a halt in production at its South Korean plants in Ulsan, Asan and Jeonju until Feb 11 due to a shortage of wiring harness parts sourced from China, which has seen extended manufacturing plant shutdowns as a result of the Wuhan virus outbreak.

 
Hyundai’s South Korean production accounts for some 40% of global output. This development underpins our sector report on Wednesday alluding to the possible spillover impact of China’s manufacturing shutdown to the automotive industry’s complex global supply chain.

Sime Darby Bhd is the official distributor of Hyundai vehicles in Malaysia. Hyundai does not operate manufacturing plants in Southeast Asia, with plants in closest proximity to the region being its plants in India, China and South Korea. Completely knocked down (CKD) models in Malaysia are contract-assembled by Inokom Corp Sdn Bhd in Kulim, Kedah.

Given Hyundai’s lack of manufacturing presence in the region, kits and completely built-ups (CBUs) for Malaysia are likely to be imported directly from the South Korean plants. Hyundai’s CKD operations in Malaysia are small, however, with only about 1,400 CKD units assembled locally in 2019 against a sales volume of 2,217 units. At this juncture, the indicative closure of Hyundai’s South Korean plants is only for about a week, while players typically have a buffer of one to two months’ worth of inventories.

For Mazda, its local component suppliers are exposed to the sourcing of certain child parts from Chinese suppliers. However, these parts are understood to be well stocked up at the moment and, in an extreme scenario, can be easily substituted from other suppliers.

Our chat with UMW Holdings Bhd, meanwhile, indicated that it sources its kits and components mainly from Asean and Japan, and that Toyota Motor Thailand is unlikely to have any exposure to parts sourced from China.

Provided that the components sourced from China are not extremely complex in nature, we think substitution should not be too much of an issue, though some increase in cost should be expected with the temporary alternative sourcing.

We maintain our “buy” call on MBM Resources Bhd, with an unchanged target price (TP) of RM4.55. At just seven times financial year ending Dec 31, 2020 (FY20) earnings, coupled with an attractive yield of 6.7%, MBM remains a cheap proxy for Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) volume expansion as well as the spillover effect on its parts manufacturing and Perodua dealership units.

Key catalysts include the launch of Perodua’s new B-segment sport utility vehicle in 2020, a recovery in industry production driven by new national car launches and the disposal of OMI Alloy (M) Sdn Bhd assets. Risks to our call include weaker-than-expected demand and a weaker-than-expected ringgit.

Bermaz Auto Bhd (BAuto; TP: RM2.70) remains a “buy”. Key catalysts include the launch of the CX8, facelift CX5 and CX30 in the second quarter ended Oct 31, 2019 (2QFY20) and 3QFY20, a dividend outperformance, an over 50% increase in FY20 export volume driven by the CX8, potential National Automotive Policy incentives to drive CBU exports, the potential introduction of a third CKD model as well as potential brand expansion riding on Inokom’s enlarged capacity and BAuto’s solid balance sheet. — MIDF Research, Feb 6