Automotive (OVERWEIGHT): The Yen connection

Automotive (OVERWEIGHT): The Yen connection

• What's New?  MYR/JPY hit its one-year low at 2.97MYR/100JPY last Friday and the weak Yen is positive for Malaysian PLCs whose imports are in Yen. Auto players are direct beneficiaries of a weakening Yen due to cheaper component costs.

Among the auto stocks we cover, BAuto has the largest exposure with about 60-65% of its component costs in FY4/15 denoted in Yen based on our forecast. The exposure to Yen is followed by TCM with ~12-14% of its component costs in FY15 denoted in Yen. Meanwhile, MBM has exposure via its (i) 22.6%-associate Perodua and (ii) 42%-owned Hino Motors Manufacturing. Perodua and Hino’s associate profit contributions account for 88-92% of MBM’s bottom line. Perodua’s Yen advantage is also slightly positive on UMWH, which is a 38% shareholder.

• Sensitivity analysis.  Every 1% variation in the Yen from our base case and on a full-year basis will affect the net profits of BAuto, MBM, TCM and UMWH by 4%/2%/1%/>1%. Our exchange rate assumption is MYR3.17: JPY100 average for 2014 (3.15 average YTD). Although UMWH (franchise holder of Japan’s Toyota in Malaysia) is the leader (in volume and market share terms) among Japanese and non-national vehicles, it is the least affected by the weaker Yen, for its component purchases are in USD.

While a weaker Yen is positive for auto players with exposure to Yen, the impact has a three- to six-month lag, depending on the extent of the hedging method used.

·         What’s our view?  We like BAuto for its huge exposure in Yen. In FY4/14, about 65% of BAuto’s purchases were denoted in Yen at an effective rate of MYR3.22/JPY100. Our sensitivity analysis suggests a potential net profit expansion by ~20% as Yen is currently trading 5% below our base case assumption of MYR3.13:JPY100 for FY4/15. MBM, our Top Pick in the sector, has exposure via its (i) 22.6%-associate Perodua – ~10% of Perodua’s components are denominated in Yen and (ii) 42%-owned Hino Motors Manufacturing - ~55% of Hino’s components are denominated in Yen, we estimate. Perodua and Hino’s associate profit contributions account for 88-92% of MBM’s bottom line. Based on our estimate, a 6% decline in our base Yen assumption of MYR3.17:JPY100 could increase MBM’s earnings by ~12%.