SECTION [D]: PROSPECTS OF AUTOMOBILE MANUFACTURERS, DISTRIBUTORS AND DEALERS/cont'd

Conclusion and Advice

The National Automotive Policy (NAP) has generally been beneficial for the automobile distributors and retailers. Prices of completely-knocked-down motor vehicles have dropped. Despite the fall in prices, the direction of the industry sales for the year 2006 is somewhat tough to estimate. From the feedback gathered from the industry, prices have yet to stabilize, both in the new and second-hand automobile segment, causing buyers to defer purchases. The uncertain direction of both interest rates and oil price are of no help either. However, with most of the listed distributors and retailers trading at the low end of their valuations, this segment of the industry could prove worthwhile for investors. For the benefit of subscribers, i Capital will rank its picks, starting with the most attractive.

[1]. UMW Holdings (UMW, 4588)

UMW Holdings (UMW, 4588)

UMW Holdings (UMW) tops the attraction list for various reasons. First, the Toyota brand sells and will continue to do so. Locally, Toyota has strategically moved away from the heavily competitive passenger car segment to the low-price multi-purpose vehicle and 4X4 vehicle segment with the launch of Avanza, Innova, Hilux and Fortuner. By using the International Multi-Purpose Vehicle project, Toyota has been able to push new models into the market at competitive prices. Going forward, the NAP and the Malaysia-Japan Economic Partnership Agreement will most likely push Toyota to assemble more vehicles locally, which is a positive development for UMW.

Adding to UMW's attraction is the group's pipe-manufacturing operation in China for the oil & gas industry. It has been generating generous returns, a performance that i Capital sees continuing for the coming years. Though conducting business in China always poses risks, we believe that the risks are mitigated by the fact that most of the ventures are done via joint ventures with reputable Chinese partners. In addition, the group is currently expanding its oil & gas upstream involvement out of China.

Not to be overlooked is the group's consistently profitable industrial and heavy equipment distribution division and the group's 38% associate stake in the fast rising Perusahaan Otomobil Kedua S/B. With rising massive cash assets waiting to be unlocked, UMW holds plenty of promises. i Capital retains its Buy for the longer term rating for UMW Holdings.

[2]. MBM Resources (MBMR, 5983)

MBM Resources (MBMR, 5983)

MBM Resources (MBMR) is second on the list. With the acquisition of a 42% stake in Hino Motors (Malaysia) S/B, which is expected to be completed by the end of 2006, MBMR will be holding the distribution rights to both Toyota commercial vehicle marques, ie Hino and Daihatsu. Daihatsu is the market leader in the truck segment with gross vehicle weight of between 4,500 to 5,000 kg, whereas Hino is a leader in the heavy commercial truck and bus segment. Like UMW, MBMR holds a 23.6% associate stake in Perusahaan Otomobil Kedua S/B. Together with Federal Auto Holdings Bhd (FAH, the biggest dealer of Volvo motor vehicles), its associate-cum-subsidiary, MBMR offers a unique blend of motor vehicles distributed and marketed under its belt. As FAH has been recording losses for the past few years (RM3.4 mln in 2005), the onus is on MBMR to turnaround FAH with the restructuring plans that MBMR has in store for FAH.

i Capital is positive on MBMR's ability to continue its dividend payout (RM0.18 since financial year 2002). This will give investors a reasonable yield for holding onto a company with solid fundamentals. With this, i Capital maintains its Buy for the longer term rating for MBM Resources.

[3]. Cycle & Carriage Bintang (CCB, 2925)

Cycle & Carriage Bintang (CCB, 2925)

Cycle & Carriage Bintang (CCB), a company that went out of investors' radar when it lost its Mercedes Benz distribution rights to DaimlerChrysler Malaysia S/B (DCM). CCB is an attractive company worth re-looking at the current price. The restructuring undertaken by the company for the last few years has been positive. The cessation of its assembly operations, together with the disposal of properties, has increased the return on assets for the group. With the group now being a pure trading-based company, the efforts to reduce headcount and convert its showrooms to Autohaus is positive.

On the put and call option attached to CCB's 49% stake in DCM that is exercisable after 2007, being a put and call option, both CCB and DCM must agree on the same outcome. Thus, it is highly possible that the 49% stake will remain with CCB and it will be a source of dividend income for CCB. What i Capital sees in CCB is a leaner company with an attractive product portfolio. Mercedes is a leading luxury brand and both Peugeot and Mazda are marques with untapped potential. With this, i Capital revises its rating for Cycle & Carriage Bintang to a Buy for the longer term.

[4]. Oriental Holdings (Orient, 4006)

Oriental Holdings (Orient, 4006)

The attraction of Oriental Holdings (Oriental) lies with its distributor rights for Honda motor vehicles in Singapore, a source of its automobile division's resilient performance. In addition, the retailing of Honda motor vehicles and the distribution of the 3 Hyundai models in Malaysia also holds promises with both marques generating significant acceptance among car buyers. With the group's oil palm plantation business in Indonesia and its huge cash assets waiting to be unlocked, Oriental proves to be a bargain, even a better one than MBMR and CCB. What is lacking in Oriental is the commitment and effort by its management to unlock the hidden values of Oriental. In short, they should run Oriental more like a publicly listed company. However, even if Oriental were to maintain its current level of operations, at the current price, Oriental is cheap. Therefore, i Capital retains its Buy for the longer term rating for Oriental Holdings.

[5]. Tan Chong Motor Holdings (TCHONG, 4405)

Tan Chong Motor Holdings (TCHONG, 4405)

Tan Chong Motor Holdings (Tan Chong) markets the Nissan and Renault marques. Nissan is practically a commercial vehicle player (albeit in a segment different from MBMR) as Tan Chong sells more Nissan commercial vehicles than passenger vehicles. The commercial vehicle segment that Nissan is strong in is in the heavy-duty truck segment (trucks of 10 tonnes and above) and the 4X4 commercial vehicles (main models being the X-Trail and Frontier). The interesting aspect about Tan Chong is that the company has been consistently generating double-digit returns on equities in an environment where profit margins have been falling year-on-year. Much of this feat is due to the group's efficiency in utilising its assets, with the asset-backed securitisation exercise taken by the group last year as a good example.

However, with most of the other players shifting their attention to the 4X4 commercial segment, competition for Nissan and Tan Chong could be stiffer in future. Though Nissan has been undergoing changes in its branding and designs to appeal to more people, it will take some time and new models before the change in perception can be felt. Though Tan Chong is a performer in terms of results, the lack of model offerings is an issue that the group and Nissan should look into. With this, i Capital retains its Buy for the longer term at below RM2.00 rating for Tan Chong Motor Holdings.

Excluded from the ranking
Sime Darby (Sime), DRB-Hicom (DRB) and Edaran Otomobil Nasional (EON) are excluded from this rating exercise. For EON, as it was not featured in i Capital before, it is not appropriate for i Capital to rate it. As Sime and DRB are conglomerates, rating them would be done separately.