Automotive (OVERWEIGHT): A play on weaker Yen

Automotive (OVERWEIGHT): A play on weaker Yen

• What's New?  MYR/JPY hit its one-year low at 2.93MYR/100JPY last Friday after Bank of Japan (BoJ) announced a massive ramp up in its stimulus programme. We have previously written a note on impact on weaker yen on Malaysian PLCs (attached in this email).

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. 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 ~26-27% on a full year basis as Yen is currently trading 6.5% 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 7.5% decline in our base Yen assumption of MYR3.17:JPY100 could increase MBM’s earnings by ~15% on a full year basis.