Stock Name: APM
Company Name: APM AUTOMOTIVE HOLDINGS BHD
Automotive sector
Maintain neutral: We maintain our 'neutral' rating on the auto sector on the back of: (i) earnings uncertainties stemming from the sector's supply chain crisis; (ii) sales contraction, reversing last year's record total industry volume (TIV); and (iii) potential price discounting towards 3Q11 and 4Q11 as players rush out sales to meet yearly commitments to principals once parts supply recovers.
As forewarned, TIV slipped by a further 10% in May to 46,045 units. This follows April's collapse ' which saw TIV drop 20% month-on-month (m-o-m) to 50,936 units. For the first five months of the year, TIV still showed a 3% year-to-date growth, but we believe this should taper off towards 4Q11 against a stronger base in 4Q10 (which was driven by heavy price discounting) and post impact of inventory replenishment in 3Q11.
May TIV also marked the first year-on-year contraction seen this year (-10% y-o-y), following seven straight months of y-o-y growth (excluding minor contractions of less than 1% in February 2011 and November 2010).
Proton took pole position from Perodua in May. The latter lost significant market share in May which could have been driven by an inventory shortage, but we think underlying demand for Perodua was weak in anticipation of the new Myvi launch. Perodua's May TIV fell 19% m-o-m driven by a 42% contraction in Myvi sales. Of the non-nationals, Honda took the worst hit with sales shrinking 41% m-o-m driven by a 63% drop in sales of the City. Toyota was the second worst performer (-23% m-o-m) as sales of its Vios model shrank by 35% m-o-m.
Production saw a slight recovery, but producton-to-sales ratio is still weak. We expect production contraction to have bottomed out in April (-20% m-o-m). May production saw a slight rebound (+4% m-o-m) to 38,909 units from 37,419 units in April, and we believe this will improve further in June.
However, May production levels are still low relative to the pre-earthquake production of an average 45,000 units per month. Production-to-sales ratio has dropped to 70% to 85% since March from 100% to 110% prior to the earthquake.
Numbers for the new Myvi could be delayed. We had highlighted in our previous report that we only expect meaningful numbers from the new MyVi to flow in from August onwards, given the shortage of parts sourced from Japan relating to engine management electronics and transmission systems.
We do not rule out the possibility of Perodua under-meeting orders which were given to parts suppliers in April to June. We understand parts orders from Perodua (for the new Myvi) trended upwards from 5,000 car sets in May to 6,000 in June and this is expected to rise to 8,000 by August.
Inventory replenishment should kick in from 3Q11, which should see sales re-accelerate. However, we are sceptical about TIV catching up to meet the Malaysian Automotive Association's estimate of 610,000 units.
We conservatively maintain our projection of a 2.5% TIV drop to 590,027 units this year ' which reflects our 6% cut in April this year in anticipation of a slowdown stemming from the supply chain crisis. Of the stocks under our coverage, we see UMW Holdings Bhd ('hold', fair value: RM6.50 per share) most at risk of earnings downgrade by the market. UMW's 1Q11 earnings were weakest against expectations, accounting for only 21% of consensus estimates versus 24% to 26% for APM Automotive Holdings Bhd and Tan Chong Motor Holdings Bhd (TCM).
For now, we expect APM and TCM to perform in line with expectations in 2Q11, as the expected weakness has been factored into projections.
APM ('buy', FV: RM6.60 per share) is our top sector pick. Despite our expectation of a soft patch in global economic recovery in the near-term, we like APM for the structural elevation in its earnings prospects stemming from: (i) regional expansion into Thailand ' whose vehicle production is three times that of Malaysia ' and Ford as a potential major customer.
Ford owns the second largest plant in Thailand with a capacity of 450,000 units per year by 2012, three-quarters the size of Malaysia's TIV; (ii) deepening localisation which means a step-up in revenue per car set from new model launches, for example, the new Myvi has resulted in 20% to 100% increases in revenue per car set for parts suppliers; and (ii) an influx of local assembly by foreign marques, like Peugeot and VW for example, which means customer base expansion for parts players. ' AmResearch, June 21
This article appeared in The Edge Financial Daily, June 22, 2011.
Company Name: APM AUTOMOTIVE HOLDINGS BHD
| Research House: AMMB | Price Call: BUY | Target Price: 6.60 |
Automotive sector
Maintain neutral: We maintain our 'neutral' rating on the auto sector on the back of: (i) earnings uncertainties stemming from the sector's supply chain crisis; (ii) sales contraction, reversing last year's record total industry volume (TIV); and (iii) potential price discounting towards 3Q11 and 4Q11 as players rush out sales to meet yearly commitments to principals once parts supply recovers.
As forewarned, TIV slipped by a further 10% in May to 46,045 units. This follows April's collapse ' which saw TIV drop 20% month-on-month (m-o-m) to 50,936 units. For the first five months of the year, TIV still showed a 3% year-to-date growth, but we believe this should taper off towards 4Q11 against a stronger base in 4Q10 (which was driven by heavy price discounting) and post impact of inventory replenishment in 3Q11.
May TIV also marked the first year-on-year contraction seen this year (-10% y-o-y), following seven straight months of y-o-y growth (excluding minor contractions of less than 1% in February 2011 and November 2010).
Proton took pole position from Perodua in May. The latter lost significant market share in May which could have been driven by an inventory shortage, but we think underlying demand for Perodua was weak in anticipation of the new Myvi launch. Perodua's May TIV fell 19% m-o-m driven by a 42% contraction in Myvi sales. Of the non-nationals, Honda took the worst hit with sales shrinking 41% m-o-m driven by a 63% drop in sales of the City. Toyota was the second worst performer (-23% m-o-m) as sales of its Vios model shrank by 35% m-o-m.
Production saw a slight recovery, but producton-to-sales ratio is still weak. We expect production contraction to have bottomed out in April (-20% m-o-m). May production saw a slight rebound (+4% m-o-m) to 38,909 units from 37,419 units in April, and we believe this will improve further in June.
However, May production levels are still low relative to the pre-earthquake production of an average 45,000 units per month. Production-to-sales ratio has dropped to 70% to 85% since March from 100% to 110% prior to the earthquake.
Numbers for the new Myvi could be delayed. We had highlighted in our previous report that we only expect meaningful numbers from the new MyVi to flow in from August onwards, given the shortage of parts sourced from Japan relating to engine management electronics and transmission systems.
We do not rule out the possibility of Perodua under-meeting orders which were given to parts suppliers in April to June. We understand parts orders from Perodua (for the new Myvi) trended upwards from 5,000 car sets in May to 6,000 in June and this is expected to rise to 8,000 by August.
Inventory replenishment should kick in from 3Q11, which should see sales re-accelerate. However, we are sceptical about TIV catching up to meet the Malaysian Automotive Association's estimate of 610,000 units.
We conservatively maintain our projection of a 2.5% TIV drop to 590,027 units this year ' which reflects our 6% cut in April this year in anticipation of a slowdown stemming from the supply chain crisis. Of the stocks under our coverage, we see UMW Holdings Bhd ('hold', fair value: RM6.50 per share) most at risk of earnings downgrade by the market. UMW's 1Q11 earnings were weakest against expectations, accounting for only 21% of consensus estimates versus 24% to 26% for APM Automotive Holdings Bhd and Tan Chong Motor Holdings Bhd (TCM).
For now, we expect APM and TCM to perform in line with expectations in 2Q11, as the expected weakness has been factored into projections.
APM ('buy', FV: RM6.60 per share) is our top sector pick. Despite our expectation of a soft patch in global economic recovery in the near-term, we like APM for the structural elevation in its earnings prospects stemming from: (i) regional expansion into Thailand ' whose vehicle production is three times that of Malaysia ' and Ford as a potential major customer.
Ford owns the second largest plant in Thailand with a capacity of 450,000 units per year by 2012, three-quarters the size of Malaysia's TIV; (ii) deepening localisation which means a step-up in revenue per car set from new model launches, for example, the new Myvi has resulted in 20% to 100% increases in revenue per car set for parts suppliers; and (ii) an influx of local assembly by foreign marques, like Peugeot and VW for example, which means customer base expansion for parts players. ' AmResearch, June 21
This article appeared in The Edge Financial Daily, June 22, 2011.
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