PP 7767/09/2010(025354)

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Group
Company No: 233327 -M
MARKET DATELINE

New Coverage
29 July 2010
APM Automotive Share Price : RM4.77

Holdings Fair Value : RM5.21

Outperform
Riding On Motor Sector’s Growth Cycle (Initiate Coverage)

Table 1 : Investment Statistics (APM; Code: 5015) Bloomberg: APM MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA EV/EBITDA Gearing ROE GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (x) (%)
2009A 918.5 72.7 36.0 42.0 13.0 - 1.5 6.3 Net Cash 11.3 2.4
2010F 988.2 86.0 42.7 18.4 11.0 50.3 1.3 4.8 Net Cash 11.9 2.8
2011F 1,095.1 95.4 47.3 11.0 9.9 55.7 1.2 3.7 Net Cash 12.4 2.8
2012F 1,252.0 110.6 54.9 15.9 8.5 64.3 1.1 2.4 Net Cash 13.3 2.8
Main Board Listing / Trustee Stock / Syariah-Approved Stock By The SC * Consensus Based On IBES Estimates

Issued Capital (m shares) 201.6

Market Cap (RMm) 947.52
♦ Leading automotive parts manufacturer. APM is one of the leading
Daily Trading Vol (m shs) 0.025
automotive parts manufacturers among over 650 players in Malaysia 52wk Price Range (RM) 1.78 – 4.90
with an estimated market share of 12.6% based on revenue. Apart from Major Shareholders: (%)
Malaysia, the company has operations in Indonesia, Vietnam and Tan Chong Consolidated 41.5
Australia. APM is the autoparts arm of Tan Chong with Tan Chong Wealthmarks Holdings 5.97
holding a 41.5% stake. APM recently expanded its overseas distribution Tan Heng Chew 3.41
network with the set up of a new company – APM Auto Components in
FYE Dec FY10 FY11 FY12
the US, which is expected to contribute to revenue growth in the long
EPS chg (%) - - -
term. The company operates in three major divisions: 1) Suspension; 2) Var to C.EPS (%) (28.4) (23.3) (26.4)
Electrical & Heat Exchange; and 3) Interior & Plastics.
PE Band Chart
♦ The investment case. The bases of our investment case for APM are:

1. APM is a good proxy to the motor sector that is currently into its PER = 14x
PER = 11x
second year of a new 3-year cycle that has started since 2009. PER = 8x

2. APM’s strong market position in the autoparts sector, being the

leading player.

3. APM’s strong growth prospects underpinned by:

a) Tan Chong’s entry into the small car segment;

Relative Performance To FBM KLCI
b) Tan Chong’s expansion into Indochina; and

c) APM’ s facility expansion.

APM Automotive
♦ Risks to our view. The risks include: 1) lower auto sales arising from
economic slowdown which will affect demand from auto makers; 2)
Weakening of RM against US$ and Yen that will result in higher cost of
sales; 3) Steep rise in raw material prices that will result in margin
squeeze; and 4) Exposure in foreign countries.
FBM KLCI

♦ Valuation. We value APM at RM5.21 based on 11x FY12/11 EPS, in line

with our 1-year forward target PER for the motor sector as the autoparts
manufacturers’ growth is highly correlated to auto makers. We are Joshua CY Ng
initiating coverage on APM with an Outperform recommendation. (603) 9280 2162
joshuang@rhb.com.my
Please read important disclosures at the end of this report.

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Background

♦ Leading automotive parts manufacturer. APM is one of the leading automotive parts manufacturers
among over 650 players in Malaysia with an estimated market share of 12.6% based on revenue. Apart from
Malaysia, the company has operations in Indonesia, Vietnam and Australia. APM is the autoparts arm of Tan
Chong with Tan Chong holding a 41.5% stake. APM recently expanded its overseas distribution network with
the set up of a new company – APM Auto Components in the US, which is expected to contribute to revenue
growth in the long term.

♦ Divisions and products. APM’s products are mainly divided into three segments: 1) Interior and Plastics; 2)
Suspension; and 3) Electrical and Heat, with the interior and plastics division being the highest-margin
products (see Chart 1). The company mainly serves the local Original Equipment Market (OEM) and
Replacement Equipment Market (REM) which made up 68% and 11% of revenue respectively. Export markets
and overseas business collectively accounted for the balance 20%. APM exports replacement parts to dealers
in Asia (35%), Europe (30%), Australia (13%) and United States (12%).

Table 2: Products by Division

Interior and Plastics Suspension Electrical and Heat

1. Automotive seats 1. Leaf springs 1. Starter motors
2. Plastic parts 2. Shock absorbers 2. Alternators
3. Body side mouldings 3. Coil springs 3. Wiper systems
4. Interior Trims 4. Metal parts 4. Distributors
5. Door Panels 5. Gas springs 5. Engine management systems
6. Air-conditioning systems
7. Condensers
8. Radiators
9. Compressors
10. Evaporators
Source: Company

Chart 1: Sales by divisions

Suspensio n
18%
Electrical & Heat
Exchange
21%

Interio r & P lastics

61%

Source: Company

♦ Customers. APM’s main customers are Perodua, Proton and Tan Chong, accounting for 51%, 23% and 12%
of FY09 OEM sales respectively. Although APM does not have any long-term contracts with these companies,
products are developed alongside these companies at the R&D stage, thus mitigating the risk of car
manufacturers switching to other suppliers for the respective models.

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Investment Case

♦ The investment case. The bases of our investment case for APM are:

1. APM is a good proxy to the motor sector that is currently into its second year of a new 3-year cycle that
has started since 2009.

2. APM’s strong market position in the autoparts sector, being the leading player.

3. APM’s strong growth prospects underpinned by:

a) Tan Chong’s entry into the small car segment;

b) Tan Chong’s expansion into Indochina; and

c) APM’ s facility expansion.

♦ First growth year in a new 3-year cycle. A closer look at Malaysia’s TIV reveals that the local motor
sector has been moving in 3-year cycles since 2000, i.e. 2000-2002, 2003-2005, 2006-2008 and potentially
we see this again for 2009-2011. TIV growth is normally seen in the second and third years of the cycle. We
believe the replacement cycle for motor vehicles, widely believed to be 5-7 years, may have accelerated in
recent years as:

1. Buyers may have been enticed by more new models; and

2. Car owners may have realised that the re-sale values of their new cars can only be maximised if the cars
are replaced within three years given the shortened product life cycle of new models now.

Chart 2: TIV vs. YoY Growth

700000 25.0

600000 20.0

15.0
500000
10.0
400000
5.0
300000
0.0
200000
-5.0

100000 -10.0

0 -15.0
2000 2001 2002 2003 2004Source:
2005 MAA,
2006RHBRI
2007 2008 2009 2010f 2011f

TIV growth yoy %

Source: Company, MAA

We believe APM is a good proxy to the motor sector. Its customers in the OEM market include both the
national and non-national car manufacturers.

♦ APM’s commanding market position. We estimate the market size of the autoparts sector in Malaysia to
be RM7.25bn (see Table 3). APM is the market leader with an estimated market share of 12.6% based on
revenue. Given the fragmented nature of the industry, its peers are generally much smaller in size. Given its
size, APM has an edge over its local competitors due to the wide product range offered and an established
record as a reliable supplier to its customers. Due to the size of the company, APM also generally has better
economies of scale as well as bargaining powers vis-à-vis car makers.

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 Table 3: Malaysia’s Automotiver Parts Industry

Market Cap Revenue FY09 Market

Company Bloomberg Ticker
(m) (RMm) Share (%)
APM Automotive Holdings Bhd APM MK 947.5 918.5 12.6
EP Manufacturing Bhd EPMB MK 83.8 457.9 6.3
Ingress Corporation Bhd INGC MK 53.8 343.1 4.7
Sapura Industrial Bhd SAPU MK 53.1 241.1 3.3
TSM Global Bhd TSM MK 194.6 238.1 3.3
Delloyd Ventures Bhd DV MK 256.8 221.6 3.1
Hirotako Holdings Bhd HIRO MK 190.8 209.5 2.9
New Hoong Fatt Holdings Bhd NHF MK 164.6 203.3 2.8
Sunchirin Industries (M) Bhd SCR MK 77.0 122.4 1.7
Autov Corporation Bhd AVB MK 48.4 86.6 1.2
SMIS Corporation Bhd SMIS MK 21.5 54.9 0.8
Mintye Industries Bhd MTYE MK 78.4 53.4 0.7
Other Auto Manufacturers^ 3150.4 43.5
Total^ 7250.0 100%
Source: Bloomberg
^ RHBRI Estimate

♦ To benefit from Tan Chong’s entry in the small segment cars. We expect APM to benefit from the
expansion of its sister company, Tan Chong. Tan Chong, which currently accounts for 14% of APM’s sales is
expected to introduce the A-segment models by end-2011 and B-segment models in FY12. A and B segments
represent the <1,000-1,500cc category respectively. These segments collectively account for more than half
of total TIV (with A-segment and B-segment accounting for 15% and 43% of total TIV respectively). We
believe the launch of the A and B segment models will increase Tan Chong’s net earnings for FY11-12 by 9.2-
15.0%. We believe the A-segment model would be similar to Nissan Micra that is currently being
manufactured in Thailand and India. The Nissan Micra has been doing well in both countries since its first
launch in Mar and Jul 10 respectively whereby bookings have already reached 7,000 units within three weeks
in Thailand and 2,000 units within two weeks in India. Being a sister company of Tan Chong, we believe APM
will most likely be picked as the key supplier of parts for these models although it will still have to go through
a bidding process.

♦ Apart from that, Tan Chong has also expanded their base into Indochina. In Dec 09, Tan Chong received an
investment licence to manufacture, assemble and sell buses, trucks and passenger cars in Vietnam.
Accordingly, Tan Chong acquired a piece of land in Danang City for US$3.04m for the construction of its
manufacturing plant. The plant is expected to become fully operational by FY12 with a target production of
1,200 units of trucks per annum. Production volume is expected to increase to 12,000 units in five years. Tan
Chong has also won distribution rights to distribute Nissan in Laos and Cambodia. We believe this is part of
Tan Chong’s long-term plan to gain a regional footprint in Indochina’s untapped auto market.

♦ APM’s growth lies in facility expansion. Over the longer term, we believe APM’s growth will come from
overseas markets in Vietnam and Indonesia. APM has recently expanded its plant facility in Vietnam to
increase its product range. APM’s existing plant located at the Vietnam-Singapore Industrial Park currently
produces leaf springs for the local market. The new plant which is located beside their existing plant site will
assemble shock absorbers, seating and air-conditioners. The plant will initially cater to the local OEM market.
The budgeted capex for this plant is estimated to be circa US$10m (RM32m) and is expected to be fully
operational by 4Q10. The opening of the plant in Vietnam will bring more opportunities for APM to expand its
customer base as Vietnam already has 17 automotive manufacturers such as Ford, Toyota and Honda
operating there. We believe APM will be able to gain at least a 10% return on investment from this plant. As
for their Indonesian counterparts, APM is also looking at more land to add to the three existing plants that
they have in Jakarta which currently produce coil springs, seating and interior parts.

Financial Analysis

♦ Performance correlates to TIV. APM’s revenue is highly correlated with total TIV (see Chart 3) as the local
OE and RE markets contribute 79% to total revenue. We note that APM still depends heavily on Perodua and
Proton, which make up more than half of their OEM revenue while contribution from their sister company,
Tan Chong is still relatively low at 12%. Note that domestic contribution has been rather flattish, where
revenue has hovered between RM800m-RM1bn since 2005 (see Chart 3). With average domestic TIV of about
520K units per annum since 2005, growth prospect from domestic operation is deemed rather limited.
Between FY12/05 and FY12/09, APM’s net profit grew at a CAGR of 9.31% despite the downturn period in
FY12/06-08 on the back of the slowdown in the automotive sector.

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 Chart 3: TIV vs. APM's Revenue

600,000 1,200.00

500,000 1,000.00

400,000 800.00

Revenue (RMm)
TIV (unit)

300,000 600.00

200,000 400.00

100,000 200.00

0 0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

TIV Revenue (RMm)

Source: Company, MAA

Chart 4: Revenue by Markets in FY09 Chart 5: Sales to Major OEM Customers in FY09

Inokom Daihatsu Honda

Outside Hyundai 2%
2% 1%
Local JV Malaysia 1% Others
1% 11% Toyota 4%
4%
Export
9%
Tan C hong Perodua
12% 51%

REM
11% OEM
68%
Proton
23%

Source: Company Source: Company

♦ Dividend policy. APM does not have any dividend policy but it is likely to maintain a payout ratio of 25-
35%. We believe consensus’ dividend projection of 16sen and 17sen for FY10-11 is achievable given the
positive outlook for APM.

♦ Forex exposure. The company has 30-35% forex exposure with the biggest currency exposure being the
US$ followed by Yen. Approximately 15% and 12% of cost of sales is denominated in US$ and Yen
respectively. Meanwhile, exports accounted for 11% of revenue, of which 4% is denominated in US$, 4% in
Euro while the remaining 2% in other currencies. Our earnings sensitivity analysis suggests that 1%
appreciation in US$ and Yen would reduce APM’s earnings by 0.9% respectively.

Table 4: Earnings Sensitivity Analysis

Currency % change % change in EPS
US$ -1.0% 0.9
Yen -1.0% 0.9
Source: RHBRI

♦ Earnings assumptions. Despite a marginal decline in FY09 margins, we expect margins and earnings to
improve in FY10 on the back of: 1) strong industry TIV growth ahead; 2) improving consumer sentiment and
business conditions; and 3) consolidation of its Seri Kembangan plant to Port Klang.

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 ♦ Capex. The company plans to spend approximately RM80m on capex for FY10 which will be used for: 1) the
final phase of the relocation and centralisation of its seating and interior facilities in Bukit Beruntung; 2)
consolidation and centralisation of its existing Seri Kembangan facilities to the existing Port Klang site; and 3)
the construction of its shock absorbers, seating and air conditioning facilities in Vietnam.

Risks

♦ Risks to our view. The risks include: 1) lower auto sales arising from economic downturn which will affect
demand from auto makers; 2) Weakening of RM against US$ and Yen that will result in higher cost of sales;
3) Steep rise in raw material prices that will result in margin squeeze; and 4) Exposure in foreign countries.

♦ Mitigation. The group uses forward exchange contracts to hedge its currency exposure. Most of the
contracts have maturities of less than one year. As at 1QFY10, the group holds RM64.4m of forward
exchange contracts or approximately 10-15% of the Group’s annual forex exposure. The contracts will be
rolled over at maturity if necessary. The group also conducts annual price revision with its customers
whereby any increase in cost of sales will be partly absorbed by their customers and likewise any decrease in
cost of sales would be enjoyed by its customers.

Valuation and Recommendation

♦ We value APM at RM5.21 based on 11x FY12/11 EPS, in line with our 1-year forward target PER for the motor
sector as the autoparts manufacturers’ growth is highly correlated to auto makers. We are initiating coverage
on APM with an Outperform recommendation.

Table 5. Earnings Forecast

FYE Dec (RMm) FY09a FY10F FY11F FY12F

Turnover 918.5 988.2 1,095.1 1,252.0

Turnover growth (%) (2.7) 7.6 10.8 14.3

EBITDA 127.0 155.2 170.8 195.2

EBITDA margin (%) 13.8 15.7 15.6 15.6

Depreciation 29.9 29.4 30.9 32.5

Amortisation 0.5 0.6 0.6 0.7
EBIT 96.6 125.2 139.3 162.1
EBIT margin (%) 10.5 12.7 12.7 12.9

Net Interest 4.1 5.1 5.3 5.5

Associates 0.0 0.0 0.0 0.0

Pretax Profit 100.6 130.3 144.6 167.6

Pretax margin (%) 10.9 13.1 13.2 13.4
Tax (18.4) (33.9) (37.6) (43.6)
PAT 72.7 86.0 95.4 110.6
Minorities 9.6 10.4 11.6 13.4
Net Profit 72.7 86.0 95.4 110.6
Net Profit margin (%) 7.9 8.7 8.7 8.8

Source: Company data, RHBRI estimates

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may 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 to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons
may from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives
of persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or

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This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
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The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based
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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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