Bumpy ride for auto business, including UMW and Tan Chong

By EUGENE MAHALINGAM | 14 December 2015


PETALING JAYA: With the slowdown in the global economy and weakening of the ringgit, 2015 has been a relatively challenging year for most auto companies.

The slowdown in sales has resulted in many auto players feeling the pinch – which translated into a tight squeeze on margins and thus making the hike in car prices inevitable.

According to an analyst from a bank-backed brokerage, the unfavourable exchange rate will have a large impact on UMW Holdings Bhd and Tan Chong Motor Holdings Bhd next year.

“These players have rather high-denominated US dollar costs, primarily because of the import of completely-built-up vehicles, completely-knocked-down kits and other parts and components that will squeeze margins.”

For its third quarter ended Sept 30, 2015, UMW’s automotive segment recorded lower revenue of RM2.60bil compared with RM2.64bil in the previous year’s corresponding quarter.

The company attributed the lower revenue to stiff competition following new model launches by other players in the market and weak consumer sentiment.

It said the weakening ringgit and higher campaign and promotion expenses had also affected its the current quarter profit for the segment.

According to MIDF Research, Perusahaan Otomobil Kedua Sdn Bhd (Perodua), of which UMW has a stake, was impacted by start-up cost at its new engine plant and an 8% year-on-year appreciation of the yen in the third quarter of 2015, despite a 12% year-on-year rise in invoiced sales.

An analyst said he expected the outlook to be challenging for UMW.

“The unfavourable exchange rate will continue to result in higher costs of imported components and impact margins. Weak consumer sentiment will have an impact on sales,” he says.

UMW’s joint venture, UMW Toyota Motor Sdn Bhd, had acknowledged earlier this year that prices of the Toyota and Lexus models are slated to rise in 2016.

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According to reports, Perodua has only increased the price of its entry-level Axia model by RM990.

MIDF said it was revising UMW’s 2015 and 2016 earnings by 28% and 35% respectively.

“Every 1% change in our US dollar assumption impacts the company’s 2016 earnings by 6%.” The research house has also adjusted down Perodua earnings by between 22% and 29% to factor in the stronger yen. It trimmed Toyota’s total industry volume by up to 9%, given the underperformance so far.

For its third quarter ending Sept 30, Tan Chong’s net profit jumped to RM29.18mil from RM1.87mil in the previous corresponding period while revenue increased to RM1.37bil from RM1.15bil a year earlier.

In its notes accompanying its third quarter results, the company said despite the earnings increase, it acknowledged that the declining ringgit against the dollar would have an impact on its bottom line.

In a report earlier this year, Kenanga Research said that for every 1% fluctuation in the dollar, Tan Chong’s bottom line could be affected by 6%. The company had not indicated if it would be raising prices next year.

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Proton Holdings Bhd, which is owned by DRB-Hicom Bhd, announced it is considering increasing its car prices starting January due to the weaker ringgit.

An industry observer said an increase in price could result in more consumers opting for Perodua vehicles.

“Proton has come a long way. However, brand issues are still on the back of the mind of many buyers, who usually prefer to opt for Perodua cars when it comes to deciding between the two brands.

“Perodua has a proven track record and also a sound technical partner in Daihatsu,” he says, adding that whether or not costs would rise for Proton would depend largely on the localisation rate of its cars.

“However, Proton is seen to continue losing market share resulting in the automotive division dragging down earnings.”

Analysts were, however, optimistic about the outlook for Berjaya Auto Bhd, which distributes Mazda vehicles.

BAuto chief executive officer Datuk Seri Ben Yeoh had said that the prices of Mazda vehicles were not likely to increase, as the cars were bought in yen, which has been stable against the ringgit.

According to Kenanga Research in a report, 50% of its total costs is exposed to the yen.

“With the monetary stimulus programme implemented by Bank of Japan, we expect the yen to stay soft.”

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