MY Automotive (POSITIVE) – Wedding of the year
- A positive development. In perhaps the most-anticipated marriage in Malaysia’s auto industry, Zhejian Geely (ZG), parent of Geely Automotive (175 HK, BUY, TP HKD12.80), has emerged as the new strategic partner of Proton. It has proposed to acquire 49.9% of Proton from DRB-HICOM (DRB MK, Not Rated). We view this development positively for Malaysia's auto sector, which could emerge as a secondary car export hub by riding on Geely's strong brand name and developed platforms to penetrate the ASEAN markets.
- Extending footprint beyond each's comfort zone. Both Geely and Proton need access to a bigger playground. While China is likely to remain the world's largest auto market, Geely's potential is capped by China's moderate growth. Similarly, car sales in Malaysia seem to have hit a saturation point (~600k units p.a.) as it has one of the highest car penetration rates in ASEAN. Against that backdrop, we believe this new partnership is necessary for both companies to unlock a larger addressable market (i.e. ASEAN region); Geely to inject technology and scale into Proton's facilities in Malaysia, which could export to the rest of the ASEAN region with fewer barriers given signed AFTA.
- Positive on MY auto sector; key beneficiaries. In the near term, the Proton-Geely partnership will first improve sentiment of the local supply chain in Malaysia, as this deal alleviates lingering concerns of Proton's sharp slowdown in recent years. Beyond that, a successful partnership could unlock a multi-year earnings growth story for both Geely and DRB-HICOM, among other related players in the supply chain. Stock specific, we see no immediate impact on Geely as the acquisition is done at its parent's level; nonetheless, this will pave way for its international expansion in the future. We reiterate BUY on Geely as it is the best structural growth story in China's auto sector. In Malaysia, we like MBM and Pecca, which could benefit as local suppliers to Proton-Geely in the event of a sudden surge in car production.
MBM Resources (MBM MK; BUY; TP: MYR2.95) – Surprises on the downside
- Affected by Perodua's production disruption . 1Q17 core net profit of MYR19m (-53% QoQ, -2% YoY) missed estimates at just 16%/20% of our/consensus FY17 forecasts with underperformance coming from the auto parts manufacturing operations (78%-owned OMI) and its auto parts JV (51%-owned Autoliv Hirotako). Taking into account the weak 1Q17, and slower recovery of its auto parts operations, we cut FY17-19 earnings forecasts by 6%-12%. Correspondingly, our TP is lowered to MYR2.95 (-6%), based on unchanged 10x FY18 PER peg. Maintain BUY on MBM for exposure to Perodua.
- To play catch-up in 2H17. We believe that the outlook for MBM will improve as Perodua's sales and production numbers recover following the introduction of facelifted Axia and Bezza, to be launched in time to capture demand in the upcoming Hari-Raya festivity in end-June. Coupled with the introduction of a new Myvi, Perodua's premium range model, in 2H17, earnings should play catch up. Also, potential job wins to supply alloy-wheels for the new Myvi could finally lift MBM’s loss-making OMI above its breakeven level, staging a meaningful earnings recovery in 4Q17.