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Friday, April 12, 2013

Carmakers set to gain from weak yen


PETALING JAYA: Local Japanese automotive franchise holders are set to gain from the weakening yen, triggered by the country's aggressive monetary easing plan.

“Auto players are direct beneficiaries of a weakening yen due to cheaper component costs. Among the auto stocks we cover, Tan Chong Motor Holdings Bhd has the largest exposure, with about 18%-21% of its component cost denoted in yen,” Maybank Investment Bank Bhd analysts like Wong Chew Hann said in a report.

According to them, every 10% variation in the yen from their base case and on a full-year basis would affect the net profits of Tan Chong, MBM Resources Bhd and UMW Holdings Bhd by 23%, 20% and 5%, respectively.

Year-to-date, the yen has fallen 13% against the US dollar and 14% against the ringgit.

They said the yen had weakened by over 6% in the past week afterBank of Japan policymakers announced they would boost monthly debt purchases, suspend a cap on some bond holdings and remove a limit on debt maturities.

“Tan Chong has the largest exposure, with about 18%-21% of its component cost denoted in yen. This is followed by MBM Resources, which has exposure via its 23.6%-associate Perusahaan Otomobil Kedua Sdn Bhd (Perodua), of which 20% of Perodua's components are denominated in yen.

“Meanwhile, Perodua's associate profit contributions account for 72%-76% of MBM's bottom line. Perodua's yen advantage is also positive on UMW, which is a 38% shareholder,” they maintained.

They said Tan Chong did not have any yen-denominated loans and had, since January, switched 15% of its imported components previously denoted in US dollars to the yen.

“Our sensitivity analysis suggests a potential net profit expansion by about 11%, as the yen is now trading 5% below our base case assumption of 100 yen/RM3.22,” they said.

“Our exchange rate assumption is an RM3.22/100 yen average for 2013. Although UMW (the 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, as its component purchases are in US dollars,” they noted.

Due to the volatility of the yen vis-a-vis other currencies, they said Japanese auto franchise holders in Malaysia, with the agreement of their respective franchisors, had agreed to denote their component purchases in US dollars.

Further, they said, in an ongoing effort to reduce the impact of currency volatility, domestic franchise holders were also targeting a greater degree of localisation in their completely-knocked-down (CKD) vehicles.

While a weaker yen is positive for the financials of these companies, the impact had a three to six-month lag, depending on the extent of the hedging method used, they added.

Hong Leong Investment Bank Bhd said Japan's foreign direct investment into Malaysia might be affected if the yen weakened further, and that Japan was the top investor in Malaysia's manufacturing sector from 2010 till 2012.

“The yen weakening clearly benefits our automotive sector, given the domination of Japanese marques. However, the majority of Japanese vehicles sold in Malaysia are assembled locally with high local content and imported CKD parts denominated in US dollars.

“Only selected high-end and low-demand completely-built-up (CBU) models are directly imported from Japan (denominated in yen). Coupled with a diversified business portfolio, the impact of the yen's movement on these companies is minor,” it said.

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