UMW Toyota, a 51% subsidiary of UMW Holdings (the other 49% in UMW Toyota is held by Toyota Motor Corporation), had just announced its plans to build a new plant in Malaysia.

UMW Toyota, a 51% subsidiary of UMW Holdings (the other 49% in UMW Toyota is held by Toyota Motor Corporation), had just announced its plans to build a new plant in Malaysia.

UMWH Holdings (UMWH MK; SELL; TP: MYR4.50) - Confirms new Klang plant worth MYR2b

• Salient details. Toyota Motor Corporation of Japan has confirmed plans to build a new plant (costing MYR2b inclusive of land, building and equipment) in Bukit Raja Industrial Estate, Klang, to be funded by internally generated funds. The new plant will be highly automated (>50% vs 30% in the current ASSB plant) with an initial annual production capacity of 50k units based on a single-shift. Combined, both plants should be able to produce up to 100k units p.a. based on a single-shift.

Upon completion of the new plant construction, UMW Toyota will reorganize its production, utilizing the new plant for the production of passenger vehicles (i.e. Vios, Camry and future new models) while the old plant will be assigned for the production of the IMV (i.e. Hilux, Innova, Fortuner) and commercial vehicles. Located just 10km away from the current ASSB plant, construction will begin in 2H16 with initial production expected to commence as early as 2019.

• Short-term negative, long-term positive. (i) High capex over the next two plus years could weaken UMWH’s balance sheet which already looks stretched with a net debt of MYR3.5b (55% net gearing) as at end-Mar 2016. Assuming 30:70 equity:debt financing, UMWH’s share of equity for the new plant works out to be MYR306m (9% of existing net debt) over the next 2+ years. In addition, debt financing to build the new plant should be consolidated into UMWH’s balance sheet too. (ii) Start-up losses for this new plant and another new investment (i.e. aerospace engineering) would cap profits in the medium term.
• A regional hub in the making? Nonetheless, UMWH’s two new investments are made to increase efficiency and diverse UMWH’s portfolio over the long run. We believe that Toyota’s moves could be strategic, potentially making Malaysia a secondary hub (Thailand is prone to floods) for selected models. Also, there could be new models in the pipeline (i.e. mini MPV Toyota Sienta revealed in KL Auto Fest 2016 last weekend, CUV C-HR); we believe that Toyota will not lay idle, allowing Honda to take over market share. This is a strategic move as Malaysia is also a TPPA member, although the ratification process remains ongoing.
• For now, we remain SELLers of UMWH premised on weak near to medium term outlook.