Automakers to gain from ringgit’s rise

The current development underpins our bullish stance on the sector and our view that FY17F earnings will be backloaded on the back of more aggressive launches and the ringgit strength in 2H17.

The ringgit is gaining strengths of late -- even reaching its strongest level in the past ten months -- and this is set to benefit automotive players if the currency continues to rise in the second half.

Ringgit watchers rejoiced last week when the currency rebounded from RM4.26 to RM4.19 per US dollar over a three-day period. This week, the currency is expected to continue appreciating in fair value and hover around 4.15-level against the US dollar.

Analysts now anticipate ringgit appreciation bias to be sustained by a confluence of domestic and external factors.

AmInvestment Bank maintained its positive view on the ringgit due to six factors including stronger economic growth, healthy inflow of foreign funds into the equities market and easing inflation pressure.

Among these factors include the continued weakening pressure on the US Dollar Index due to the ongoing sentiments in the US.

To note, the US Dollar Index is a measure of the value of the dollar relative to a basket of foreign currencies.

AmInvestmentt Bank expects exo the index to hover around 90 to 91 in 2017.

“From our estimates, it shows more room for the ringgitri nggi t tot o strengthen. Our fair value for the ringgit is around 3.95 against the US dollar.

“However, our year-end target for ringgit is 4.12 while our full year average is 4.31.to 4.33,” it said.

Bearing this in mind, MIDF Research compared the ringgit’s uprising with the recently reported 1H17 earnings which came on the back of still inflated levels of RM4.39 per US dollar.

“The current development underpins our bullish stance on the sector and our view that FY17F earnings will be backloaded on the back of more aggressive launches and the ringgit strength in 2H17.

“Who benefits? Of the auto players under (our) coverage, UMW Toyota has the largest exposure to the US dollar given that all its imported completely knocked-down (CKD) kits and completely built up units (CBUs) from Thailand are transacted in US dollar.

“Given low localisation rates of between 20 per cent to 60 per cent relative to the national makes of 80 per cent to 95 per cent, we estimate around half of total component costs are imported,” it said.

“Tan Chong, meanwhile, is estimated to have circa 80 per cent of total imported cost exposure to US dollar imports with the rest in Japanese yen.” MIDF Research explained that every one per cent change in the US dollar impacts its FY18F by 4.7 per cent for UMW Group and 16 per cent for Tan Chong.

“As Tan Chong is loss making -relative to the steady state earnings of RM200 million to RM300 million annum prior to the downcycle -- it is more sensitive to forex changes now.”

Japanese yen-exposed beneficiaries

The ringgit had also strengthened against the Japanese yen over the past six months and currently stands at RM3.88 per 100 yen.

Bermaz Auto is a key beneficiary of the Ringgit strength against the yen as its imports are 100 per cent exposed to the latter.

To note, Bermaz Auto is exposed to the yen via CBU imports, whereas CKDs such as the CX5 and Mazda 3 models are purchased at a fixed ringgit price from 30 per cent-owned Mazda Malaysia Sdn Bhd (MMSB), which is the importer of Mazda CKD kits and assembler.

“To make this possible, MMSB absorbs yen volatilities from CKD imports; which means that MMSB also benefits from the current ringgit’s strength,” it added. “We estimate that every one per cent strengthening of the Ringgit against the yen impacts BAuto’s FY18F earnings by three per cent.

“Perodua is another beneficiary given its exposure to the yen, and partly, US dollar.”

MIDF Research saw that automotive players’ earnings in 2Q already showed signs of improvements.

For example, UMW autos’ pretax improved 14 per cent q-o-q to RM99 million while Tan Chong’s losses narrowed 35 per cent q-o-q to a net loss of RM23 million in 2Q17 on the back of improved volumes and slight improvement in forex. Aggressive campaigns roll out

Looking at campaign roll-outs, the research firm saw that nonnationals marquees were turning more aggressive.

Volume recovery has been healthy with year to date (YTD) total industry volume (TIV) growth of 4.7 per cent; Honda (29 per cent YTD) and Toyota (22 per cent YTD) are leading this TIV growth.

“Given the strong performance, Honda will be launching two additional models on top of the four – Honda BRV, Jazz Hybrid, City Hybrid, CRV – that were planned and already launched.

Toyota is launching four facelifts – the Vios, Fortuner, Hilux and Camry models – in 2H17. Toyota has also opened registration of interest for the popular CH-R model (B-segment SUV, competes with the CX3 and HRV) and is currently touring the Klang Valley to showcase the model prior to an expected launch in FY18.

“Our recent visit to a CH-R showbooth suggests a possible 3Q18 launch of the CBU-spec CH-R, to be available in two specs, namely the 1.8 litre and 2 litre hybrid with indicative initial import batch of 500 units.

“The first round of showcase at Setia City Convention Centre back in May already generated registration of interest by over 3,000 potential buyers. CKD of the CH-R is likely after UMWT’s Bukit Raja plant is completed by early FY19F, which could bring down cost of the CH-R substantially.

“The new Camry and the CH-R are expected to be Toyota’s key models for FY18F. On the national car front, Perodua which is 38 per centowned by UMW is speculated to launch the new MyVi in 2H17.”