PP 7767/09/2010(025354)

Malaysia
24 March
RHB Research2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Sector Upda te
MARKET DATELINE 24 March 2010

Recom : Overweight
Motor (Maintained)

Feb 10 TIV Up 8.7% Yoy, Pointing To Resilient

Growth Ahead

Table 1: Motor Sector Valuations

Fair EPS growth PER P/NTA P/CF ROE GDY
Price
FYE Value (%) (x) (x) (x) (%) (%) Rec
(RM/s) (RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
Proton^ Mar 4.18 5.48 39.0 7.5 6.4 6.0 0.4 0.4 n.m 6.3 0.0 OP
MBM Dec 2.72 3.93 62.4 5.3 5.9 5.6 0.7 0.6 14.3 11.9 4.4 OP
Tan Chong Dec 3.23 3.60 39.6 3.3 10.2 9.9 1.4 1.2 8.3 14.2 3.5 OP
UMW Dec 6.28 6.71 52.3 2.5 12.3 12.0 2.0 1.8 8.8 15.8 3.7 MP
Sector 44.1 7.0 10.1 9.4
Sector Avg (ex-Proton) 47.3 6.8 17.1 16.0
^ Refer to FY11-12

♦ TIV up 8.7% yoy in Feb 10. Malaysian automotive industry’s TIV Chart 1. TIV Growth
increased 8.7% yoy in Feb 10 (vs. +32.8% yoy in Jan 10) with 40,654 600,000 100.0

units sold (vs. 59,622 units in Jan 10). We believe the resilient growth in 500,000
80.0

Feb 10 TIV is largely due to the low base factor arising from the sharp
60.0

400,000 40.0

contraction beginning Oct 08 as well as pent-up demand stemming from 300,000

20.0

0.0

car buyers postponing big-ticket purchases in 2009. However, the lower 200,000 -20.0

-40.0

yoy increase in TIV was largely due to lower yoy growth for most of the 100,000
-60.0

top marques as well as yoy contraction for Honda.

0 -80.0

2009F

2010F
1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008
♦ Seasonally weaker on a mom basis. Accordingly, mom sales declined TIV (LHS) Growth yoy % (RHS)

by 19.7% (vs. +6.2% mom or 59.6k units in Jan 10) due to the shorter
Chart 2. Market Share
working month as well as strong demand for new car registrations in Jan
10. On a mom basis, Proton, Perodua, Honda and Nissan reverted to a 60.0

contraction of 23.8%, 19.9%, 45.6% and 16.9% (vs. +11.3%, +6.4%, 50.0

+45.1% and +15.6% in Jan 10). However, Toyota’s mom contraction 40.0

moderated to 8.6% (vs. -12.2% in Jan 10). 30.0

%

♦
20.0

Improving prospects. We believe there are potential upside to our

10.0

passenger and commercial motor vehicles unit sales projections given: 1) 0.0

rising positive sentiment; 2) better business conditions supported by

2009F

2010F
1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

Government’s stimulus packages; 3) higher economic activities; and 4) Proton Perodua Toyota Nissan Honda

introduction of new models to help spur demand. Source: MAA, RHBRI

♦ Maintained 2010-12 TIV projections. We are keeping our 2010-12 TIV
projections unchanged for now.
♦ Risks. The key risks to our projection would be: 1) Inflationary pressure
amid economic recovery; and 2) Weakening of RM against US$ and Yen.
♦ Investment case. The strong mom gain in Dec 09 (+5.5%) which bucks
the trend of seasonal decline arising from year-end registrations as well
as still resilient growth in Feb 10 (+8.7% yoy), suggest that strong
demand for cars would likely flow through 2010. Hence, we expect TIV for
motor vehicles to turn around from a contraction of 2.0% in 2009 to a
positive growth of 8.5% in 2010 and 2.5% in 2011. We believe there is
potential upside to our 2010-11 TIV projections given stronger-than-
expected car sales arising from higher business spending as well as new Wong Chin Wai
(603) 9280 2158
model launches. We reiterate our Overweight stance on the sector. Our
wong.chin.wai@rhb.com.my
top pick for the sector is Tan Chong.

Please read important disclosures at the end of this report.

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 24 March 2010

Total Industry Volume (TIV)

Units and Growth:

♦ TIV up 8.7% yoy in Feb 10. Malaysian automotive industry’s TIV increased 8.7% yoy in Feb 10 (vs. +32.8%
yoy in Jan 10) with 40,654 units sold (vs. 59,622 units in Jan 10). We believe the resilient growth in Feb 10 TIV
is largely due to the low base factor arising from the sharp contraction beginning Oct 08 as well as pent-up
demand stemming from car buyers postponing big-ticket purchases in 2009. Despite a shorter working month
(due to Chinese New Year) with the same festive holidays that fell on Jan 09, the five consecutive months of yoy
growth suggests that the sector is poised to register a stronger growth in 2010.

Chart 3: TIV And Yoy Growth

60,000 60.0

50.0
50,000 40.0

30.0
40,000
20.0

10.0
Units

%
30,000
0.0

-10.0
20,000
-20.0

10,000 -30.0

-40.0

0 -50.0
Jan-06
Feb-06
Mar-06
Apr-06
May-06
Jun-06
Jul-06
Aug-06
Sep-06
Oct-06
Nov-06
Dec-06
Jan-07
Feb-07
Mar-07
Apr-07
May-07
Jun-07
Jul-07
Aug-07
Sep-07
Oct-07
Nov-07
Dec-07
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08
Oct-08
Nov-08
Dec-08
Jan-09
Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Oct-09
Nov-09
Dec-09
Jan-10
Feb-10
TIV (LHS) Yoy Growth (RHS)

Source: MAA, RHBRI

♦ Yoy growth moderated for most marques. The lower yoy increase in TIV was largely due to lower yoy
growth for most of the top marques as well as yoy contraction for Honda. Note that yoy growth for Proton,
Perodua, Toyota and Nissan moderated to 10.1%, 6.5%, 14.3% and 3% respectively (from +42.9%, +36.7%,
+38.8% and +30% in Jan 10). Furthermore, we note that Honda reverted to a yoy contraction of 27.8% (vs.
+1.6% in Jan 10).

Chart 4: TIV Mom & Yoy (units) Chart 5: TIV Mom & Yoy Growth

TIV TIV 8.7

(19.7)

Honda (27.8) Honda

(45.6)

3.0
Nissan (16.9) Nissan

Toyota Toyota 14.3

(8.6)

Perodua Perodua 6.5

(19.9)

10.1
Proton (23.8) Proton

0 10,000 20,000 30,000 40,000 50,000 60,000 (50.0) (40.0) (30.0) (20.0) (10.0) 0.0 10.0 20.0

Feb-09 Jan-10 Feb-10 mom yoy

Source: MAA, RHBRI Source: MAA, RHBRI

♦ Seasonally weaker on a mom basis. Accordingly, mom sales declined by 19.7% (vs. +6.2% mom or 59.6k
units in Jan 10) due to the shorter working month as well as strong demand for new car registrations in Jan 10.

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 24 March 2010

On a mom basis, Proton, Perodua, Honda and Nissan reverted to a contraction of 23.8%, 19.9%, 45.6% and
16.9% (vs. +11.3%, +6.4%, +45.1% and +15.6% in Jan 10). However, Toyota’s mom contraction moderated
to 8.6% (vs. -12.2% in Jan 10).

Chart 6: TIV & MoM Growth

60,000 30.0

50,000 20.0

40,000 10.0
Units

30,000 0.0

%
20,000 -10.0

10,000 -20.0

0 -30.0
Jan-08
Feb-08
Mar-08
Apr-08
May-08
Jun-08
Jul-08
Aug-08
Sep-08

Jan-09
Oct-08
Nov-08
Dec-08

Feb-09
Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09

Jan-10
Oct-09
Nov-09
Dec-09

Feb-10
TIV (LHS) Mom Growth (RHS)

Source: MAA, RHBRI

Chart 7: TIV YTD 09 vs. YTD 10 Chart 8: TIV YTD 10 Yoy Growth

TIV TIV 20.9

Honda (11.1) Honda

Nissan
Nissan 16.2

Toyota
Toyota 25.9
c
Perodua
Perodua 21.4
Proton
Proton 26.6
0 20,000 40,000 60,000 80,000 100,000
Units (20.0) (10.0) 0.0 10.0 20.0 30.0

YTD 09 YTD 10 yoy

Source: MAA, RHBRI Source: MAA, RHBRI

Table 2: Motor Sales For Feb 2010

Feb-09 Jan-10 Feb-10 mom chg yoy chg YTD 09 YTD 10 yoy chg
(Nos.) (Nos.) (Nos.) (%) (%) (Nos.) (Nos.) (%)
Proton 10,017 14,485 11,031 (23.8) 10.1 20,151 25,516 26.6
Perodua 12,216 16,240 13,015 (19.9) 6.5 24,092 29,255 21.4
Toyota 5,367 6,710 6,136 (8.6) 14.3 10,200 12,846 25.9
Nissan 2,414 2,990 2,486 (16.9) 3.0 4,714 5,476 16.2
Honda 2,919 3,876 2,108 (45.6) (27.8) 6,734 5,984 (11.1)
TIV 37,386 50,622 40,654 (19.7) 8.7 75,493 91,276 20.9
Passenger 33,992 45,973 36,551 (20.5) 7.5 68,621 82,524 20.3
Commercial 3,394 4,649 4,103 (11.7) 20.9 6,872 8,752 27.4
Source: MAA

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 24 March 2010

Market Share:

♦ We note that Proton and Perodua which dominated the <RM50K passenger vehicles segment continued to show
improvement, with YTD market share of 28.0% and 32.1% respectively (vs. 26.7% and 31.9% previously). We
believe that although the market is improving, consumers are still cautious and preference continues to be for
the more economical range. Nevertheless, we expect demand for premium cars to improve ahead as economic
recovery gains more traction. Furthermore, Toyota market share of 15.1% in Feb 10 (vs. 13.3% in Jan 10 and
14.4% in Feb 09) suggests that car buyers’ confidence in Toyota marques remains intact despite the quality
issues for certain Toyota marques in US and Europe.

Chart 9: Market Share Feb 09, Jan10 & Feb 10 Chart 10: Market Share YTD 09 vs. YTD 10

5.2 6.6
Honda 7.7 Honda
7.8 8.9

6.1 6.0
Nissan 5.9 Nissan
6.5 6.2

15.1 14.1
Toyota 13.3 Toyota
14.4 13.5

32.0 32.1
Perodua 32.1 Perodua
32.7 31.9

27.1 28.0
Proton 28.6 Proton
26.8 26.7

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Feb-09 Jan-10 Feb-10 YTD 09 YTD 10

Source: MAA, RHBRI Source: MAA, RHBRI

Chart 11: TIV growth vs GDP growth

100.0 12.00

10.00
80.0
8.00
60.0
6.00
40.0
4.00

20.0 2.00

0.0 0.00
1991

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2009F

2010F
x -2.00
-20.0
-4.00
-40.0
-6.00
-60.0
-8.00

-80.0 -10.00

TIV Growth Yoy % (LHS) GDP % (RHS)

Source: RHBRI

Sector Outlook

♦ Chinese marques to be assembled in Malaysia? We understand that Berjaya Corp (BCorp) is negotiating
with the Government on the grant to manufacture Chinese marque BYD given the current freeze on the new
manufacturing licences for the production of petrol-powered cars below 1.8 litres. Recall in Feb 2010, BCorp has
secured a deal from BYD Auto Company (fourth largest car assembler in China) to assemble cars for the Asean
market. However, we believe the freeze will unlikely be lifted given that: 1) entry of CKD Chinese cars would
pose a threat to Proton and Perodua; and 2) over-capacity issues in the local car assembly industry.

♦ Global sales showing strong uptrend especially China. Despite news of massive safety recalls made by
Toyota, Ford, General Motors, Suzuki and Nissan, the auto sales in the global market do not seem to be affected
by this. For China, the combined auto sales in Jan-Feb surged 84% yoy, buoyed by the government’s car
purchase incentives (i.e. lower tax-cut and old-for-new programme in January 2010) as well as strong sales
ahead of the Chinese New Year.

♦ Positive underlying factors. We expect demand for passenger and commercial motor vehicles to improve
further in 2010 as 1) sentiment recovers; 2) better business conditions supported by the Government’s stimulus
packages; 3) higher economic activities; and 4) introduction of new models to help spur demand. Note that we
expect consumer spending to pick up from +2.5% in 2009 to +4.8% in 2010.

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♦ Maintained 2010-12 TIV projections. We are keeping our 2010-12 TIV projections unchanged for now.
Hence, we expect TIV to turn around to a stronger growth of 8.5% in 2010 and 2.5% in 2011, following a
contraction of 2% in 2009.

Table 3:Motor Sales Forecast By Key Marques

2009a 2010 2011 2012 2010 2011 2012
(Nos.) (Nos.) (Nos.) (Nos.) (% yoy) (% yoy) (% yoy)
Proton 148,031 157,940 162,854 163,926 6.7 3.1 0.7
Perodua 166,736 195,090 196,803 202,252 17.0 0.9 2.8
Toyota 81,785 89,512 91,106 97,110 9.4 1.8 6.6
Nissan 31,493 34,227 35,847 36,365 8.7 4.7 1.4
Honda 38,783 35,000 37,000 43,348 -9.8 5.7 17.2
TIV 536,905 580,599 596,332 605,956 8.5 2.5 2.2
Passenger 486,342 528,351 542,381 559,127 8.6 2.7 3.1
Commercial 50,563 51,352 52,967 45,983 1.6 3.1 -13.2
Source: RHBRI

Risk & Mitigations

♦ Risks. The key risks to our projection would be: 1) Inflationary pressure amid economic recovery; and 2)
Weakening of RM against US$ and Yen.

Valuations And Recommendation

♦ Tan Chong turning stronger ahead. TCM is expected to introduce A and B segment models by end-2011,
which the company is currently not represented in these segments (A and B segments represent the <1,000cc
and 1,000-1,500cc category respectively). Note that these segments collectively account for more than half of
total TIV (with A-segment and B-segment accounting for 15% and 43% of TIV respectively). Management
expects FY12 earnings to double yoy mainly due to stronger units sales growth (on the back of these new
models) as well as margin expansion stemming from higher utilisation of its Serendah plant. Hence, we reiterate
our Outperform call on the stock with unchanged SOP fair value of RM3.60. We highlight potential re-rating
catalysts of: 1) higher-than-expected sales of its A and B segment cars; 2) earlier-than-expected earnings
contribution from its regional expansion; and 3) earlier-than-expected development of Segambut land. Given
rising demand and improving prospects as well as more positive developments, we continue to like the stock as
the top pick in the sector.

♦ Positive outlook for Proton. We see a brighter year ahead for Proton as sales of Exora are getting stronger
amidst the gradual economic recovery coupled with the anticipated launch of Waja replacement model, which is
expected to take place in 2H2010. Furthermore, we highlight that we have not factored in potential earnings
contribution from contract manufacturing as well as tie-ups in India and Iran. Fair value maintained at RM5.48
based on stripped-down book value. We reiterate our Outperform call on the stock.

♦ UMW – sales of Toyota remain resilient despite quality issues. Despite the recent problems with certain
Toyota cars in the US, we understand that Jan-Feb unit sales were up 22% yoy as car buyers remain
unperturbed by the quality issues which are limited to US and Europe. We have highlighted that the quality
issues affecting Toyota cars are limited to US and Europe given that auto part models in this region are sourced
from different suppliers. We expect brighter prospects for Toyota as it will benefit from improving sentiment and
affordability on the back of economic recovery, where preference towards premium products will start to
improve. For O&G division, we expect increased contract flows ahead in 2H 2010 driven mainly by: 1) stronger
exploration activities; and 2) revival of deepwater projects on the back of rising trend of crude oil prices over the
longer term. We are positive on the acquisition of the remaining stake in Naga Two and Three as well as jv for
onshore drilling as these will boost earnings contribution from O&G going forward. We thus reiterate our Market
Perform call on the stock. No change to our SOP-based fair value of RM6.71 for now, which is based on 15x
PER for its automotive and oil & gas divisions and 7x for its heavy equipment and manufacturing divisions.

♦ MBM still rated Outperform. In line with the increasing demand for MPV, the launch of Perodua Alza is
anticipated to increase MBM’s market share. The manufacturing segment is also looking on the upside as
demand picks up due to the economic recovery and improved sentiment. We believe there is still upside to our
FY10-11 earnings projections from higher unit car sales and associate Perodua contributions on the back of
improved sentiment as well as stronger-than-expected sales of the newly-launched MPV. Hence, we maintain
Outperform call with a fair value of RM3.93 per share.

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 24 March 2010

♦ Maintain Overweight stance on the sector. The strong mom gain in Dec 09 (+5.5%) which bucks the trend
of seasonal decline arising from year-end registrations as well as still resilient growth in Feb 10 (+8.7% yoy),
suggest that strong demand for cars would likely flow through 2010. Hence, we expect TIV for motor vehicles to
turn around from a contraction of 2.0% in 2009 to a positive growth of 8.5% in 2010 and 2.5% in 2011. We
believe there is potential upside to our 2010-11 TIV projections given stronger-than-expected car sales arising
from higher business spending as well as new model launches. We reiterate our Overweight stance on the
sector.

Table 4: MAA's Forecasts for 2010-14

2010 2011 2012 2013 2014

Passenger 498,300 514,500 530,500 546,000 562,400

Commercial 51,700 52,000 53,000 54,000 55,600

TIV 550,000 566,500 583,500 600,000 618,000

Growth (%) +2.4 +3.0 +3.0 +2.8 +3.0

Source: MAA

IMPORTANT DISCLOSURES

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differ or be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or
more over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take
on higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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