Monday, May 30, 2011
Auto Sector Report
We maintain our NEUTRAL rating on the auto sector on the back of: (1) rising earnings uncertainties due to parts supply shortages from Japan; (2) a slowing TIV growth; (3) potential price discounting towards 3Q11-4Q11 as players rush out sales to meet yearly commitments to principals once parts supply recovers.
The government yesterday announced a hike in electricity tariff and gas price, effective 1 June 2011. Electricity tariff has been increased by an average 8%, while gas price is increased by an average 17% for industrial users. We see this as a marginal negative for auto players. We estimate electricity to account for circa 1%-2% of Proton’s operating cost and 0.4%-0.5% for TCM and UMW. APM is mainly impacted by the gas tariff increase as gas cost accounts for close to 3% of APM’s spring plant production cost. We estimate spring plants to account for close to half of APM’s production capacity.
An 8% electricity rate hike and 17% gas tariff hike is estimated to impact Proton’s earnings by 3%, TCM by 0.3%, UMW by 0.4% and APM by 1.2%. Note that these estimates are based on a full-year impact of the tariff increases. As the tariff increase is only effective 1 June, the impact on FY11F earnings should be half the aforementioned amounts. On the bright side, we believe these cost increases can be easily passed through or absorbed via manufacturing efficiency.
APM as an example has a cost-pass through mechanism via a periodic price review with key clients. The price review is done every six months while compensation is received every 12 months, retrospectively – this is usually booked in the 3Q-4Q. As such, we see a minimal impact from the cost hike to APM’s earnings. We believe Proton too should be able to pass through the increase in cost to consumers.
Assuming the price of a Proton Exora is raised by 3%, (from an average RM80,000 to RM82,400), this would only result in monthly instalments increasing from RM1,101/month to RM1,106/month i.e. a net RM5/month increase (assuming a nine-year loan tenure and 5% hire purchase rate), which is marginal, in our opinion. We leave our ratings unchanged on APM (BUY, FV: RM6.60/share), Proton (BUY, FV: RM4.30/share), UMW (HOLD, FV: RM6.50/share) and TCM (HOLD, FV: RM4.30/share).
Source: Company / AmResearch