Monday 14 September 2015

Automotive Sector & Weak Ringgit

For the past one year, MYR has depreciated almost 35% against USD (RM3.20 to RM4.30).

As a result, export-orientated stocks celebrate.

What about those import-orientated stocks?


Weakening of MYR is definitely not good for importers as cost of goods will be higher and profit margin will be lower.

Automotive industry selling foreign brands are one of those importers that suffer.

Even though most of the non-national cars on the road are CKD (completely knocked down) which means they are assembled locally, some of the parts are still imported.

Below are some info I get from SinChew daily last week which shows localisation rate of 3 most famous non-national car brands and their forex exposure.

  • Toyota (UMW) local parts 40-50%, import 50-60% in USD
  • Honda (DRBHicom) local parts 50%, import 50% in JPY
  • Nissan (TChong) local parts 40-50%, import 40% in USD, 10% in JPY

As I also follow BJAuto closely, I know that about 40% of its CKD parts are sought locally and the rest should be imported from Japan in JPY.

  • Mazda (BJAuto) local parts 40%, import 60% in JPY

We know that USD has strengthened a lot against MYR, so UMW & TChong who import CKD packs in USD should have a hard time.

Until two months ago, JPY still remain weak due to Japan's QE.

So those companies who import from Japan have enjoyed a good time.

This is especially true for BJAuto who still sell quite a lot of CBU cars imported from Japan last year, though more CKDs are on the way.

However, in August 2015, MYR suddenly fell a lot against USD while JPY strengthen a little against USD.

This makes MYR weaken by almost 16% against JPY (RM310 to RM360) in just about one month's time!

       MYR/JPY surge in Aug15

       MYR/JPY going toward recent high

With this kind of situation, I think BJAuto should be most affected.

Nevertheless, the good news is, BJAuto's management has hedged the currency at RM3.15/100JPY until the end of CY2015. This is just slightly higher than RM3.10/100JPY in the first quarter of 2015.

What if the JPY still stays at RM3.60 level or even higher at the end of 2015?

I think this forex issue should not be overlooked.

To what extent will the weak MYR affect automotive sector in Malaysia?

A google search found this article in, which quoted research from Maybank IB.

USD exposure

UMW ~35% COGS (cost of goods sold)
TChong ~19% COGS

Every 1% variation from RM3.60 on a full year basis will affect net profit by

  • TChong 8%
  • UMW 4%
  • MBMR 1%

At RM4.30/USD now, MYR has weakened 20% from RM3.60 level. Does it mean that TChong's net profit can be potentially lower by 20 x 8% = 160% (loss???).

I mention "potentially" here because things are definitely not that straight forward. The RM4.30 level is not an average level on full year basis, those companies should have hedged the forex risk and are also involved in other business other than assembling & distributing vehicles etc

JPY exposure

BJAuto ~37% component cost
TChong ~5%
Perodua (MBMR/UMW) ~10%
Hino (MBMR) ~50%

Every 1% variation from RM3.03 on a full year basis will affect net profit by

  • BJAuto 3%
  • TChong 2%
  • MBMR 2%
  • UMW 1%

At RM3.60/100JPY recently, MYR has weakened about 19% against JPY from RM3.03.

So, will BJAuto's net profit be potentially lower by 19 x 3 = 57%???

BJAuto's net profit in FY15 (ends 30th Apr15) is RM219.5mil.

Another research house Kenanga reported that every 1% fluctuation from base rate RM3.05/100JPY will affect BJAuto's bottom line by 4%.

So a 18% change will affect its bottom line by 72%?? That's a lot!

Does it mean that BJAuto's annual net profit will be lower than RM100mil?

According to RHB Research, every 10sen change in MYR/100JPY will affect BJAuto's pre-tax profit by RM3-4mil.

However, I don't know the base rate RHB use for this.

If I assume the base rate to be around RM3.00/100JPY, a 60sen change (in similar scenario above) will reduce its pre-tax profit by RM18-24mil. 

This doesn't look too bad right?

In the end, I still don't know clearly to what extent weak MYR can affect automotive sector even with all these researchers' analysis.

Anyway, BJAuto's financial results should not be affected drastically until year end as the management has hedged MYR/100JPY at RM3.15 level.

CBU cars imported from Japan will be directly hit by strong JPY.

Fortunately for BJAuto, most of its popular models are already CKD which include CX-5, Mazda 3 and soon-to-follow Mazda 6.

However, recently-launched Mazda 2 Skyactiv is a CBU imported from Thailand. I think it should be traded in JPY and so its already lower profit margin will be further affected.

BT-50 pick-up truck is also imported from Thailand but it should not affect BJAuto much due to its low volume.

Other CBU from Japan include Biante, MX-5, CX-9, facelifted Mazda 6 and already phased-out Mazda 5 Skyactiv version.

All these models are not expected to generate high volume, except for Mazda 6 I guess.

As mentioned earlier, Mazda 6 will be available in CKD soon probably around end of the year.

The main problem for BJAuto is its imminent launch of CX-3 which is a mini SUV fully imported from Japan.

CX-3 should be a model that goes for volume with lower margin. So it might be affected heavily if JPY stays strong next year.

       CX-3 to rival HR-V

For BJAuto's CKD vehicles, about 60% parts are imported.

However, the import of these CKD packs is solely done by MMSB (Mazda Malaysia Sdn Bhd) in which BJAuto only owns 30% share.

BJAuto will then buy the fully assembled CKDs from MMSB for local distribution and export.

So, strong JPY should not have a direct effect on BJAuto's CKDs.

MMSB which is 70% owned by Mazda Japan will be more directly hit by strong JPY.

The question is, will MMSB still sell the CKDs cheap to BJAuto?

Automotive sector is very competitive in Malaysia. Lots of brands are doing "fire sales" to clear their inventories.

Almost for sure, BJAuto's profit margin will go under pressure from now on.

Can it still continue with its impressive growth in revenue & profit? This will very much depend on how many cars it can sell I think.

Do you think Mazda's car has the competitive edge? I think so.


  1. I suppose this means automotive sector is not a right sector to invest for the time being due to uncertainty in forex and weak domestic consumption, is my interpretation correct ?

    1. I think so.. but I might be wrong. Anyway, I'm still targeting BJAuto, though the sudden rise in JPY is a real concern...

    2. I checked out BJAuto and found it's ROE is at 40+, that is astonishing ! Both UMW and TChong are with single digit ROE, so I wonder how selling Mazda car can get so much higher profitability when compared to selling Toyota and Nissan cars ? Do you have any idea what BJAuto has done differently in their operation ? Can the high ROE sustains ?

    3. That's the point! BJAuto's business is simple - import Mazda cars and distribute/sell them. They are ASSET-LIGHT. That's why high ROE. Now even though Mazda is moving towards CKD, it is through its 30%-owned MMSB & 24%-owned Inokom. They are just associates companies.

      So, there is not many PPE in BJAuto unlike UMW/TChong who owns the manufacturing facilities (I think so..) and have to keep higher inventories in CKD packs and also directly exposed to manufacturing cost.

    4. This comment has been removed by the author.

  2. when talk about car, personally I like VW which is ckd by Hicom, looks humble and solid, really a piece of art, hundred see not bored. In contrast, all the japanese cars are too curvy, tend to be feminine.

    Btw, what do u think' bout Elsoft and recent quarterly changes? KCchong said it has the highest ROIC among eletronics stocks.

    1. From historical point of view, Elsoft's quarterly results tend to fluctuate a lot. What I know about this company is that its growth since 2009 is simply phenomenal. I'm not too sure about its future as I do not study it in detail. I'd say that its business does not interest me.

  3. Just read a new book called "the rising above financial storm" authored by Tan Chong Koay, the founder of Pheim Asset Management.

    He investment philosophy is trying to time the market the best u can, whereby he did manage to exit at the peak and catch the bottom across many financial crisis in the Asia stock market from 1897, 1991, 1997, 2003, 2008 to 2013.

    Recently he managed to exit oil & gas counters at the end of 2014, his recent years best picks got Inari, and Matrix. (Matrix I guess he is still holding since IPO.)

    Recommend it to u!

    1. Thanks! I don't read a lot of books but I like investment books by local authors more.

  4. This comment has been removed by the author.

    1. Generally I will regard significant forex gain/loss as one-off item and try to exclude it from profit/loss IF the amount is relatively huge. So I'd say that I won't give it higher PE.

      I'll refer to historical PE but not that much. To me good business that have good potential to grow will overwrite low/high PE. I should have bought Magni in 2013 but its historically low PE discouraged me. Now I can only regret.

    2. I suppose the forex gain/loss is not always can be separated and excluded. When USD strengthen, it will cause the increase in selling price and hence the revenue for export oriented business. But, we can't know how much to deduct from the revenue for the extra gain... I am not sure if I am right ?

    3. I just take the reported forex gain/loss in the financial report for consideration. Others just leave it alone :)

  5. Hi BD,

    What do you think about the PBA ?

    Best regards
    Brian Ng

    1. From history, PBA's quarterly profits tend to fluctuate a lot despite stable revenue. I'm not sure why. Tariff hike will surely bring its profit to a new level so I think its current share price of RM1.07 is still low.

      I see utility stocks as stable lower risk regular income type of investment with good dividend but slower growth. Surely its revenue will continue to grow year by year after this but its profit is not guaranteed to grow together. Historically its profit is in declining trend even though revenue is increasing which means cost has been increasing non-stop. I don't think PG gov will raise tariff again in the near future, may be have to wait until 10-20 years later.

      Kedah constantly wants PG to pay for the water supply. Though I think it is unlikely to happen but it should affect PBA if it does.

    2. Hi BD,

      Thanks for the reply. I agree with you on this.

      How about Superln ?


    3. I nearly bought Superlon when it's around RM1.30, eventually I didn't bcos I'm too cautious of the weak broad market... I think this co is growing slowly, with market expansion & slight capacity expansion if I'm not wrong. It is also helped by weak MYR and low raw material NBR price. CF & BS are also good.

      Overall I think it's a good stock. It might get RM15mil net profit in FY16 with near 19sen projected EPS.

    4. Hi BD,

      Thanks for your reply. with 0.19 sen EPS and forwarding PE of 10 (I always like to use conservative PE), the share price should be 1.90. I will proceed to buy some.


    5. Good luck to your investment :)