Initiating Coverage - I3investor

Initiating Coverage | UMW Holdings | 18 June 2013

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(Member of Alliance Bank group) PP7766/03/2013 (032116)

18 June 2013

Positives mostly priced-in We initiate coverage on UMW Holdings Berhad (UMW) with a NEUTRAL rating and TP of RM13.60. While fundamentals have been improving particularly the oil & gas division, we believe most of the positives have already been priced-in given its strong price performance over past year. UMW is currently trading at CY13 and CY14 P/E of 16x and 14x, respectively which are at premium to peers. On the other hand, we believe intensifying competition in the auto sector in the near term may negatively affect UMW’s automotive segment and offset gains to be made in other segments. Intensifying competition in the auto sector We believe the local automotive industry has become increasingly more dynamic and

competitive; especially the non-national car segment. Toyota and its two other major Japan automaker rivals, Honda and Nissan, have been aggressive in their marketing effort to recapture lost market share from US, European and South Korean marques.

The recent launch of Nissan Almera into the highly competitive B-segment market is expected to intensify competition in the market, both national and non-national segment.

NAP review will lead to wait and see by potential car buyers Another revision of the National Automotive Policy (NAP) is expected to be announced

in 2013 whereby more liberalisation measures may be undertaken. For the time being, potential car buyers may adopt a wait and see approach in view of

the impending new NAP, which could see the gradual reduction in import tax and excise duty, in our view.

Unlocking oil & gas value via an IPO UMW plans to list its oil & gas unit by 4Q this year. The group will divest 39% of its stake

and retain a 61% stake in the soon-to-be listed company, UMW-OG Group. We believe the listing will unlock the value of its investment in oil & gas assets and the

proceeds could be utilised to pare down borrowings (assuming UMW will undertake offer for sale).

To note, UMW will recognise a one-off disposal gain from the listing of its O&G division. That said, earnings contribution would drop due to reduced equity holding post the IPO.

11.5% earnings CAGR over next 3 years We expect UMW to post an 11.5% earnings CAGR over the next 3 years, mainly driven

by its oil & gas division. The PBT contribution from oil & gas segment will increase by 183%, 57% and 23% in

FY13, FY14 and FY15, respectively. The earnings growth is mainly supported by (1) new drilling rigs coming on stream i.e.

NAGA 4 in FY13 and NAGA 5 in FY14, and (2) higher charter rate for rigs upon contract renewal.

Valuation and recommendation UMW has significantly outperformed the FBMKLCI over the last 12 months. We believe

further share price appreciation is now limited as most positives have been priced-in. UMW is currently trading at CY13 and CY14 P/E of 16x and 14x, respectively which are at

premium to its peers as well as almost 2 standard deviations above its mean P/E of 12x. Our sum-of-parts derived target price of RM13.60, implies potential downside risk of -

2.9% (after taking into consideration the dividend yield of 3.9%). With that, we rate UMW as NEUTRAL.

UMW Holdings Neutral Automotive Bloomberg Ticker: UMWH MK | Bursa Code: 4588

Initiating Coverage

Analyst Angeline Chin [email protected] +603 2604 3911 12-month upside potential Target price 13.60 Current price (as at 17 Jun) 14.60 Capital upside (%) -6.8 Net dividends (%) 3.9 Total return (%) -2.9 Key stock information Syariah-compliant? Yes Market Cap (RM m) 17,057.1 Shares outstanding (m) 1,168.3 Free float (%) 33.5 52-week high / low (RM) 14.72 / 8.43 3-mth avg volume ('000) 2,122.0 3-mth avg turnover (RM m) 29.4 Share price performance 1M 3M 6M Absolute (%) 4.4 9.8 23.1 Relative (%) 4.1 1.1 15.3 Share price chart

Major shareholders % Permodalan Nasional Berhad 42.5 Employees Provident Fund 14.0


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SNAPSHOT OF FINANCIAL AND VALUATION METRICS

Figure 1 : Key financial data

FYE 31 Dec FY11 FY12 FY13F FY14F FY15F Revenue (RM m) 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6 EBITDA (RM m) 1,905.4 2,102.8 2,288.6 2,473.1 2,608.7 EBIT (RM m) 1,607.8 1,817.4 1,978.0 2,128.1 2,234.0 Pretax profit (RM m) 1,381.5 2,009.7 2,143.3 2,330.1 2,490.9 Reported net profit (RM m) 502.1 994.3 1,097.7 1,213.8 1,306.8 Core net profit (RM m) 836.7 941.9 1,097.7 1,213.8 1,306.8 EPS (sen) 43.0 85.1 94.0 103.9 111.9 Core EPS (sen) 71.7 80.6 94.0 103.9 111.9 Alliance / Consensus (%) 101.7 103.3 105.3 Core EPS growth (%) 42.1 12.4 16.5 10.6 7.7 P/E (x) 20.4 18.1 15.5 14.1 13.1 EV/EBITDA (x) 9.6 8.7 8.1 7.5 7.0 ROE (%) 11.8 20.5 20.7 20.9 20.6 Net gearing (%) 8.8 10.1 7.1 6.7 8.0 Net DPS (sen) 31.0 50.0 56.4 62.3 67.1 Net dividend yield (%) 2.1 3.4 3.9 4.3 4.6 BV/share (RM) 3.64 4.15 4.54 4.97 5.43 P/B (x) 4.0 3.5 3.2 2.9 2.7 Source: Alliance Research, Bloomberg

Figure 2 : 12-month forward P/E trend Figure 3 : 12-month forward P/B trend

Source: Alliance Research, Bloomberg Source: Alliance Research, Bloomberg

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Figure 4 : Peer comparison

Company Call Local Currency

Target price

Share price

Mkt Cap (USD m)

EPS Growth (%) P/E (x) P/BV (x) ROE (%)

Net Dividend Yield (%)

CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 Malaysia UMW Holdings Neutral RM 13.60 14.60 17,057.1 16.5 10.6 15.5 14.1 3.2 2.9 20.7 20.9 3.9 4.3 Tan Chong Motors NR RM NR 6.71 4,380.4 109.5 16.2 13.2 11.4 2.0 1.8 16.6 16.9 2.2 2.4 DRB-Hicom NR RM NR 2.76 5,335.7 -69.5 12.6 11.5 10.2 0.7 0.7 5.9 7.1 1.9 2.2

Average

14.6 11.9 14.4 12.9 2.5 2.3 17.1 17.5 3.2 3.6

China/Hong Kong

SAIC Motor Corporation NR RMB NR 14.17 25,507.3 11.9 12.0 6.7 6.0 1.1 1.0 17.2 16.9 3.9 4.3 Great Wall Motor Co Ltd NR HKD NR 33.35 15,262.5 24.5 16.1 11.3 9.7 3.0 2.5 28.6 27.5 2.4 2.8 Dongfeng Motor Group NR HKD NR 11.42 12,680.5 7.6 7.4 7.9 7.4 1.2 1.1 16.5 15.2 1.8 2.0 WeiChai Power NR HKD NR 25.75 6,564.1 21.7 17.0 11.1 9.5 1.4 1.2 13.4 13.9 1.4 1.5 Brilliance China Automotive Holdings NR HKD NR 8.67 5,615.4 28.6 22.2 11.6 9.5 2.7 2.1 25.4 24.2 0.4 0.5

Guangzhou Automobile Group NR HKD NR 8.02 7,974.0 116.7 44.6 16.2 11.2 1.2 1.1 7.8 10.3 1.8 2.4 Geely Automobile NR HKD NR 3.64 3,880.9 11.9 17.6 9.5 8.1 1.6 1.3 17.8 18.0 1.4 1.6 Zhongsheng Group NR HKD NR 8.72 2,144.7 67.9 37.6 10.5 7.6 1.5 1.3 15.2 17.5 1.8 2.5 Baoxin Auto Group NR HKD NR 6.20 2,043.3 120.7 33.3 9.2 6.9 2.4 1.8 29.6 31.2 1.6 2.3 China ZhengTong Auto Service NR HKD NR 4.18 1,190.5 56.6 33.3 7.7 5.8 1.0 0.8 13.2 15.3 0.1 0.3 Sinotruck HK NR HKD NR 4.05 1,441.0 350.0 51.1 17.8 11.8 0.5 0.4 2.8 4.0 1.5 2.0 Average 35.8 18.6 9.8 8.1 1.7 1.4 18.5 18.4 2.4 2.7 Indonesia Astra International NR IDR NR 6,950 28,449.0 3.0 14.5 14.1 12.3 3.4 3.0 25.4 25.0 3.3 3.7 Indomobil Sukses Int'l NR IDR NR 5,200 1,453.9 14.9 33.6 15.6 11.7 2.4 2.1 15.4 16.4 1.1 1.3 Average 3.6 15.4 14.1 12.3 3.4 2.9 24.9 24.6 3.1 3.6 Source: Alliance Research, Bloomberg Share price date: 17 June 2013


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BACKGROUND INFORMATION Leader in Malaysia’s automotive industry UMW Holdings Berhad (UMW) is a leading industrial enterprise which focuses on four strategic businesses namely, automotive, equipment, manufacturing & engineering and oil & gas industries. UMW was founded in 1917 when Chia Yee Soh, the group's founder, set up a small automotive spare parts shop named United Motor Works. In 1987, Permodalan Nasional Berhad (PNB) bought out UMW and become its major shareholders as the group experienced financial difficulty due to the economic crisis. Subsequently, UMW formed a joint venture company, Perodua, with Japanese partners and holds 38% of it. The company started operations in 1994 and Perodua Kancil (the second Malaysian car project) was introduced to the Malaysian market in August the same year. UMW has gradually expanded its business and ventured into equipment and manufacturing & engineering industry. The group started its oil & gas division in 2002 through an assorted portfolio of greenfield investments and acquisitions. Since then, automotive, equipment, manufacturing & engineering and oil & gas division have become UMW’s core businesses. Apart from Malaysia, UMW has international presence in Singapore, Indonesia, Thailand, Myanmar, Vietnam, Papua New Guinea, Australia, Taiwan, China, Hong Kong, India, Oman and Turkmenistan. It currently has a total of 128 branches, 191 dealers and staff strength of about 13,142. The group leads the Malaysia’s automotive industry with 47.1% market share via Toyota (17%) and Perodua (30.1%) marques in 2012.

Figure 5 : Key achievements / milestones of UMW

Source: Company, Alliance Research

Focuses on four strategic businesses - automotive,

equipment, manufacturing & engineering and oil & gas industries

Leads the Malaysia’s automotive industry with 47.1% market share


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Figure 6 : Domestic and international presence

Source: Company, Alliance Research Major shareholders UMW has 2 major shareholders, namely PNB and EPF, which hold approximately 42.5% and 14.0% stake in UMW (direct and indirect). Management The management of UMW is currently led by Datuk Syed Hisham Bin Syed Wazir, which was appointed as President & Group CEO in 2010. He has almost 30 years of professional experience, including senior management positions in the automotive field. He served as Managing Director of Edaran Otomobil Nasional Bhd from 12 May 2005 to 31 August 31 2009. Subsequently, he served as the Chief Operating Officer at Naza Kia Sdn Bhd and Naza Kia Services Sdn Bhd from December 2009 to August 2010.

Figure 7 : Board of directors

No. Name Designation 1 Tan Sri Asmat bin Kamaludin Group Chairman/Non-Independent Non-Executive Director 2 Datuk Syed Hisham bin Syed Wazir President & Group CEO/Non-Independent Executive 3 Dato’ Dr. Nik Norzrul Thani bin N.Hassan Thani Non-Independent Non-Executive Director 4 Dato’ Mohd. Nizam bin Zainordin Non-Independent Non-Executive Director 5 Dato’ Siow Kim Lun Independent Non-Executive Director 6 Wan Kamaruzaman bin Wan Ahmad Non-Independent Non-Executive Director 7 Dr. Leong Chik Weng Independent Non-Executive Director 8 Khalid bin Sufat Independent Non-Executive Director


PNB and EPF are major shareholders


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BUSINESS STRUCTURE UMW is involved in the automotive, equipment, equipment and manufacturing & engineering and oil & gas businesses in Malaysia and internationally. The automotive division is the largest contributor to the group’s revenue (72%), followed by equipment (13%), oil & gas (10%) and manufacturing & engineering (4%) in FY12. UMW plans to list its oil & gas unit by 4Q this year. The group will sell 39% of its stake in the IPO and retain 61% stake in the soon-to-be listed company, which will called UMW-OG Group. The listing will only comprises of the drilling and oil field services while the other unprofitable oil & gas associate (mainly manufacturing of pipes and fabrication) will be classified under the “Other” division in the UMW Group going forward.

Figure 8 : Review of business segments


Automotive Oil & GasEquipment Manufacturing & Engineering

UMW Toyota Motor Lexus Toyota

Perusahaan OtomobilKedua Perodua

Heavy Equipment Construction Mining Agriculture Forestry Industrial Fire-fighting and oil

spill

Industrial Equipment Material-handling

equipment Industrial cleaning

equipment Type & batteries

Marine & power equipment Industrial

compressors Marine engines Industrial standby

generators Power products CNG refueling

stations

Lubricants & Fluids Pennzoil Repsol Grantt GEP fluids &

coolants

Shock Absorbers / Power Steering KYB

Auto Components Filtration products Metal stamping DENSO spark plugs

& wiper blades GEP filters & brake

pads

Drilling Operations Semi-submersible

rig Jack-up rigs Land rigs Workover rigs

Oilfield Services Generator

packages Pipe coating Pipe inspection,

repair & threading

Manufacture of Pipes Seamless OCTG SSAW Line Pipes LSAW Line Pipes

Fabrication Onshore &

offshore structures Industrial cranes

Oilfield Products


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AUTOMOTIVE Automotive is UMW’s largest division, accounting for RM11.5bn or 72% of total revenue for FY12. The group leads the Malaysia’s automotive industry with 47.1% market share via Toyota (17%) and Perodua (30.1%) marques in 2012. The group has an extensive product range (sedan, MPVs, SUVs & 4WD, hybrid, van and sports) to capture different market segment or niches. It currently has a broad sales network with 191 dealers (54 for Toyota and 142 for Perodua).

Figure 9 : UMW auto division structure

Source: Company

Figure 10 : Breakdown of Malaysia TIV’s market share (2012) Figure 11 : Sales unit by brands

Source: Company Source: Company

Perodua30.1%

Toyota17.0%

Proton22.5%

Nissan5.8%

Honda5.6%

Hyundai, Kia2.1%

Volkswagen2.1%

Others14.9%

020,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

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2011 2012

Automotive is the largest division which contributed 72% of total

revenue for FY12


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Figure 12 : Model range

Source: Company

Toyota - market leader in the non-national car segment UMW, via its 51% owned subsidiary, UMW Toyota Motor, engaged in the manufacturing/assembly, marketing and distribution of the Toyota marque, and the marketing and distribution of Lexus vehicles. Note that Toyota is the market leader in the non-national car segment in Malaysia and has maintained this leadership position for 23 consecutive years. The group sold 106,622 units of Toyota vehicles in 2012. Its top selling models such as Vios, Hilux, Avanza and Camry have helped to maintain its remarkable business success beating other main rivals such as Nissan and Honda, which hold market share of 5.8% and 5.6%, respectively. Besides, Toyota also launched its first hybrid model, PRIUS C in February 2012 and has been well received locally. Subsequently, a sportier variant of the PRIUS C, TRD Sportivo joins the line-up in January 2013. Meanwhile, UMW is also the exclusive distributor of Lexus vehicles in Malaysia since 2006.

Figure 13 : Models

Source: Company

Engaged in the manufacturing/assembly,

marketing and distribution of the Toyota marque, and the marketing

and distribution of Lexus vehicle


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Figure 14 : Toyota and Lexus unit sales breakdown vs. market share

Source: Company Perodua – market leader in the overall market UMW is the single largest shareholder (38% stake) of Perodua, the manufacturer of Malaysia’s second national car, which has a niche market in the affordable segment (A-segment). Perodua has the largest market share in both national-car and total TIV segment. It captured 30.1% TIV market share in 2012. Perodua vehicles are exported to seven countries, namely, UK, Singapore, Brunei, Fiji, Nepal, Mauritius and Sri Lanka. Its popular model, Myvi was Malaysia’s best-selling model since it was launched in 2005. Myvi is a subcompact hatchback model targeted to female and first time car buyers. Besides, Perodua also produces small compact car- Viva, which has a smaller engine capacity (cc) and cheaper price. On top of that, the Perodua Alza is a compact MPV produced by Perodua targeted at young families and urban singles. Perodua is setting up a new plant in Rawang to produce additional 100,000 vehicles yearly on a one-shift cycle on top of the existing plant which is able to produce 200,000 units per annum, on a two-shift cycle. The new plant is expected to be completed by mid-2014. In tandem with the increase in capacity, Perodua has projected to export 20,000 vehicles overseas by 2015. It has produced 194,985 units (including export) for 2012.

Figure 15 : Perodua unit sales breakdown vs. market share

Source: Company

0%2%4%6%8%10%12%14%16%18%20%

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Unit Sales (LHS) Market Share of TIV (RHS)

Perodua has the largest market share in both national-car and total

TIV segment: 30.1% market share in 2012

Myvi is Malaysia’s best-selling model since it was launched in 2005

Setting up a new plant in Rawang


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EQUIPMENT The equipment division is the second largest contributor to the group in terms of revenue and profit in FY12. This division can be categorised into three main segments: heavy equipment, industrial equipment and marine & power equipment. Its products are being used in various industries (agriculture, construction, forestry, mining, industrial & manufacturing and industrial cleaning – food and beverage, material handling and logistics).

Figure 16 : Equipment division

Source: Company

Heavy equipment UMW has built a strong reputation in the construction industry, providing heavy equipment from renowned brands around the world. Some of the products include excavators, concrete pumps, loaders and rollers. It currently holds the Komatsu franchise in Malaysia, Singapore, Papua New Guinea and Myanmar. UMW has a strong presence in the heavy equipment industry in Malaysia with an overall market share of 31.1%. Besides, its operation in Myanmar also performed well due to the strong demand for machines from the jade mining industry. Industrial equipment This division focuses on industrial equipment, material handling equipment and industrial power products. The products include forklifts, towing tractors, warehouse trucks, compressors and road sweepers. Toyota forklift is one of the top 5 distributors in the world and it has maintained its No.1 position in Malaysia for more than 38 years with 50% market share in the material handling equipment business. Marine and power equipment UMW also offers marine and power equipment such as industrial compressors, marine engines, generating sets and portable power products in this division for more than 40 years. Its business partners comprise some of the world’s leading multinational names such as CompAir, Cameron, Mitsubishi and Honda.

Second largest contributor to the group in terms of revenue and

profit in 2012

31.1% market share of heavy equipment industry in Malaysia

Toyota forklift is one of the top 5 distributors in the world and it has

maintained its No.1 position in Malaysia for more than 38 years


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OIL & GAS In order to reduce the reliance on automotive, manufacturing and engineering and equipment segment activities, UMW started its oil & gas division in 2002 through an assorted portfolio of greenfield investments and acquisitions. Apart from Malaysia, the oil & gas division currently has operations in Australia, China, India, Indonesia, Oman, Singapore, Taiwan, Thailand, Turkmenistan and Vietnam. This division consists of five key segments: Manufacture of oil country tubular goods and line pipes Oil & gas exploration operations and development operations (drilling) Fabrication of oil & gas and other steel structures Provision of oilfield services Supply of oilfield products The anchor of the oil & gas division is the drilling business and UMW currently has a fleet of four offshore drilling-rigs (NAGA 1, 2, 3 and 4). NAGA 1, a semi-submersible drilling rig, is co-owned with Japan Drilling Co. Ltd. The group also owns and operates two premium jack-up drilling rigs, NAGA 2 and NAGA 3. NAGA 1 and NAGA 3 are contracted out to Petronas Carigali Sdn. Bhd. for operations in Malaysia, while NAGA 2 operates in lndonesia for HESS (Indonesia-Pangkah) Limited. NAGA 4 is a new jack-up drilling rig which was recently delivered in Feb 2013. NAGA 4 has been chartered out to Petronas Carigali for a duration of three years, with an option to extend for another two years. The group has recently announced the acquisition of a fifth drilling rig for a total consideration of USD223m. The new rig is expected to be completed and delivered by May 2014.

Figure 17 : Details of UMW’s major rigs

* JV with Japan Drilling Co. Ltd Source: Company, RigZone, Maritime Connector

NAGA 1 NAGA 2 NAGA 3 NAGA 4 To be namedOwnership 50% * 100% 100% 100% 100%Year of build 1974 2009 2010 2013 2014Gross tonnage (tons) 16,394 9,627 9,627 10,450 -DWT (tons) 21,120 5,834 4,366 3,500 -Drilling depth (feet) 30,000 30,000 30,000 30,000 30,000Operating water depth (feet) 985 350 350 400 400Customers Petronas Carigali HESS

(Indonesia-Pangkah) Petronas Carigali Petronas Carigali

-

Contract period 5 years from Nov 2010Extention for another 2 years

commencing Aug 2016

3.7 years from Sep 2010 2 years from Mar 2012 3 Years from 2H 2013 (with two-year renewal option) -

Contract value USD250m (5 years)USD130m (2 years extension)

USD183m USD105m USD157.68-

Remarks Went through a major refurbishment exercise in 2012,

extending its life span for another 15 years

Will provide the NAGA 2 rig and related services to PetroVietnam in MAY 2013 after completing its

contract with HESS.

The rig is currently under construction and is expected to be completed and delivered by

May 2014

UMW started its oil & gas division in 2002 through an assorted

portfolio of greenfield investments and acquisitions

The group currently has a fleet of four offshore drilling-rigs (NAGA 1,

2, 3 and 4)


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UMW’s oil and gas investments also include a 22.3% stake in WSP Holdings Limited (WSP), which is listed on the New York Stock Exchange. WSP is a leading manufacturer of Oil Country Tubular Goods (OCTG) in China. The company offers casing, tubing and drill pipes used for oil and natural gas exploration, drilling and extraction. Note that WSP is a loss-making entity as the company has been adversely affected by the anti-dumping and countervailing duties imposed by the United States of America on OCTG imported from China. WSP has agreed to take the company private in a statement released on 21 February 2013. This privatisation is expected to be completed by the second quarter of 2013. Excluding the impairment charges due to unfavourable fair value movements in hedging instruments and overseas investments, UMW’s oil & gas division has successfully turned around in 2011, primarily due to the contributions from its three offshore drilling rigs (NAGA 1, 2 and 3). This division continued to perform well in 2012 with 22.4% growth in revenue.

MANUFACTURING & ENGINEERING Manufacturing & engineering is the smallest business division of UMW as it only contributed about 4% of the group’s total revenue in FY12. The group has the exclusive marketing and distribution rights for Pennzoil (lubricants to vehicles). UMW is also the principal agent for REPSOL to distribute the REPSOL brand of lubricants throughout Asia (China, Malaysia, Singapore, Brunei, Papua New Guinea and Myanmar). Besides, two of its subsidiaries, KYB-UMW Malaysia and KYB-UMW Steering Malaysia continued to be the largest shock absorber and power steering pump manufacturers in Malaysia and market leaders in the OEM and replacement automotive products markets. The group also has a blending plant in Xinhui, China with an annual output capacity of 50m litres. The plant, which blends and distributes REPSOL and GEP branded lubricants, has expanded the distribution network to South, West and Central China, Hong Kong and Macau. UMW also has presence in India where one of its Indian’s subsidiaries, UMW Dongshin Motech, is a major OEM for stamped automotive body parts for car manufacturers in India. Its customers in India include General Motors, Volkswagen, Tata and Hyundai.

Figure 18 : Key products

Source: Company

WSP has agreed to take the company private in 2Q13

Manufacturing & engineering is the smallest business division to UMW


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INVESTMENT CASE Intensifying competition in the auto sector We believe the local automotive industry has become increasingly more dynamic and competitive; this is especially for the non-national car segment. Toyota, together with the other two Japan automaker rivals Honda and Nissan, has been aggressive in marketing their cars to recapture lost market share to U.S, European and South Korean marques. The newest entry of Nissan Almera into the highly competitive B-segment market is expected to intensify competition in the market, both national and non-national segment. UMW expects Toyota and Perodua sales to reach 105,000 units (-1.5% y-o-y) and 194,000 units (+2.6% y-o-y), respectively in 2013. Toyota will only launch 1 new model this year while Lexus will introduce 1 or 2 new models but sales volume is expected to be very low. Management highlighted that a 3rd-generation Toyota Vios (new model) is targeted to be launched in Malaysia by 3Q. Meanwhile, the highly speculated new Toyota Corolla Altis model will only be launched in 2014. On the other hand, the exemption of hybrid cars from import and excise duties until 31 December 2013 has led to a surge in hybrid vehicle sales. The sales of hybrid cars had increased 84% to 15,355 units compared to 8,334 units in 2011. We gather that Toyota’s compact hybrid model, Toyota PRIUS C, has been extremely well received by customers since its introduction in February 2012. Management highlighted that over 4,000 units have been sold as at 11 Jan 2013 and demand continues to be high as it is one of the most affordable hybrid models available in the market. To capitalise on the demand trend, UMW Toyota Motor has added a TRD Sportivo version to its PRIUS C line-up in January, which is priced at RM103,990 compared to PRIUS C at RM97,300. Nonetheless, we believe the newly launched of Honda Jazz hybrid CKD (complete knock-down), Honda Insight and CR-Z may threaten the sales of Toyota Prius C due to competitive pricing. In-terms of market share, Honda is still the market leader in Hybrid segment with 57% market share in 2012, followed by Toyota ( 37%), Lexus (6%) and Porsche (<1%). In a nutshell, we do not rule out the possibility that Toyota might lose market share to its rivals if the launch of new models do not take place in time.

Figure 19 : Toyota PRIUS C and Toyota PRIUS C TRD Sportivo

Source: Toyota Malaysia

We believe the local automotive industry has become increasingly

more dynamic and competitive

UMW expects Toyota sales to reach 105,000 units (-1.5% y-o-y) and

Perodua sales of 194,000 (+2.6% y-o-y) in 2013

Duty exemption on hybrid cars has led to a surge in sales


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As for Perodua, it has recently launched its new 2013 S-series line, the Perodua Myvi 1.3 SE, the Perodua Viva S and the Perodua Alza S which are expected to be the main sales drivers this year. The S-Series models are facelift models which are set to replace the current Viva BZ, Myvi 1.3 Premium and standard Alza variant. The S-Series models are expected to make up 45% of Perodua’s total sales for 2013. Besides, a 3-year free service for all models (deal is worth RM1,100 to RM1,200) is expected to be one of the attractive points to lure buyers.

Figure 20 : Perodua S-Series

Source: Toyota Malaysia

Unlocking oil & gas value via an IPO UMW is undergoing a restructuring exercise for its oil & gas division. The higher revenue contributions from NAGA 1, NAGA 2 and NAGA 3 coupled with higher day-rate has helped to turnaround the segment after two consecutive years of losses. Management expects this division to perform better in FY13 mainly driven by full year contribution from NAGA 1, NAGA 4 (newly secured contract) and the commissioning of the new Electric Resistance Welded (ERW) and coating plant in China. To recap, UMW did not enjoy a fully contribution from NAGA 1 in FY12 as rig upgrading works were carried out for a duration of 281 days (from 13 Apr 2012 until 18 Jan 2013). On the other hand, UMW is planning to list its oil & gas division by 4Q of 2013. The group will sell 39% of its stake in the IPO and retain 61% stake in the soon-to-be listed company, which will called UMW-OG Group. The listing will only comprises of the drilling and oil field services while the other unprofitable oil & gas associate (mainly manufacturing of pipes and fabrication) will be classified under the “Other” division in the UMW Group going forward. We believe the listing could unlock the value of its investment in their oil & gas assets and the proceeds could be utilised to pare down borrowings (assuming UMW will undertake offer for sale). The listing could be also one of the best alternatives to fund future capex requirements for the oil & gas business. To note, UMW will recognise a one off disposal gain (which depends on the listing price and size of disposal) from the listing of the O&G division. That said, earnings contribution would also drop due to reduced equity holding post the IPO.

Perodua has recently launched its new 2013 S-series line, which is

expected to be the main sales driver this year

Undergoing a restructuring exercise for its oil & gas division

Planning to list its oil & gas division by 4Q 2013


15

The newly delivered jack-up drilling rig, NAGA 4 has been chartered out to Petronas Carigali for a duration of three years with higher chartered rate (approximately USD146,000 per day), with an option to extend it for another two years. We view that PETRONAS’s local preference policy is beneficial to UMW, as their Malaysian flagged rigs would be preferred over foreign-owned rigs. A key local competitor for now is Perisai Petroleum Teknologi, who has not yet take delivery of their first rig. To note, we do not consider SapuraKencana as a direct competitor as they focus on tender barge rigs. The group has also recently announced the acquisition of its fifth drilling rig for a total consideration of USD223m. The new rig is expected to be completed and delivered by May 2014. Management has guided that the group has submitted several bids in Malaysia and within ASEAN, and is confident of securing at least one long-term contract. Thus, the acquisition will enable UMW to capture available business opportunities on the back of current high demand for rigs. We highlight that demand for offshore drilling services has been propelled by a surge in E&P activities as Malaysia looks to transform itself into a regional oil & gas trading hub by 2020. Local oilfield service providers (especially for the upstream players) are in the midst moving into a boom cycle, leveraging on the government's interest in promoting the country's petroleum industry and PETRONAS’s planned capex of RM60bn per annum (RM300bn over 5 years). We believe UMW is well-positioned to capitalise on PETRONAS’ preference for locally-owned rigs and its continued support in developing local oil & gas service companies. More jack-up rigs and lift boats are expected to be deployed in 2013 to meet continuing strong demand within the oil and gas industry. On the other hand, we gather from Rigzone website that jack-up rig utilisation is healthy globally and has increased from 79% one year ago to 83.1% utilisation now.

Figure 21 : Historical competitive offshore rig utilization by rig type

* Utilization numbers are based on a snapshot rig count. Only competitive rigs are included. Source: Rigzone

Rig TypeDrill Barge 80.0% (8/10) 80.0% (8/10) 90.0% (9/10) 80.0% (8/10)

Drillship 82.9% (68/82) 82.7% (67/81) 84.8% (67/79) 81.3% (61/75)

Inland Barge 0.0% (0/1) 0.0% (0/1) 0.0% (0/1) 100.0% (1/1)

Jackup 84.0% (342/407) 83.2% (337/405) 82.1% (320/390) 79.0% (305/386)

Semisub 91.1% (173/190) 90.0% (171/190) 82.1% (156/190) 81.2% (151/186)

Tender 81.3% (26/32) 74.2% (23/31) 82.8% (24/29) 86.2% (25/29)

Current Month Ago 6 Months Ago 1 Year Ago

No issue in securing new contract

5th rig to be delivered by 2Q 2014

Well-positioned to capitalise on Petronas’ preference for locally-

owned rigs


16

Figure 22 : Type of drilling units

Source:Rigbook

Figure 23 : Onshore and offshore drilling

Source:Rigbook New NAP – A wait and see approach Another revision of the National Automotive Policy (NAP) is expected to be announced in 2013 whereby more liberalisation measures may be implemented. We opine that gradual liberalisation will help to improve market sentiment and increase TIV as consumers tend to replace their vehicles more frequently, given a wider variety of competitively priced models. We believe the up-coming review of NAP may lead to the reform of the whole local automotive industry to compete with Thailand or even Indonesia's automotive industry. For the time being, some consumers are still adopting a wait and see approach in view of the impending NAP review, which would see the gradual reduction of import tax and excise duty, in our view. Besides, as the domestic automotive industry already strives towards higher component localization, a review of tax structure in the auto sector is highly anticipated.

Another revision of the National Automotive Policy (NAP) is

expected to be announced in the near term

Consumers are expected to adopt a wait and see approach in view of

the impending NAP review


17

Decent dividend payout ratio We believe a steady dividend payout is part of the long-term strategy of UMW to provide attractive risk-adjusted returns to its stockholders. The group has consistently pay out 58% to 76% of its net profits as dividends in the past five years. UMW has a dividend policy of paying out at least 50% of its PAT. We are forecasting a dividend payout of 60% from FY13 throughout FY15. This translates into a dividend yield of 3.9% - 4.6% for FY13-FY15.

Figure 24 : Dividend payout ratio Figure 25 : Dividend per share

Source: Company, Alliance Research Source: Company, Alliance Research

FINANCIAL HIGHLIGHTS Sterling performance in FY12 UMW posted a sterling performance in 2012 where its core net profit (excluding exceptional items) surged 22.8% and surpassed the RM1bn mark for the first time in the group’s history. The commendable results were mainly driven by higher revenue from the automotive (+18.8% y-o-y) and oil & gas segments (+39.9% y-o-y). On top of that, the equipment and manufacturing & engineering segments also showed some improvement. Automotive division registered strong revenue growth due to the higher TIV number achieved. For 2012, Toyota and Perodua reported 294,024 units of total vehicle sales, an increase of 8.7% or 23,480 units compared with 270,544 units in 2011. With that, the group’s market share has also improved by 2 percentage point to 47% in 2012. Note that the group has launched 7 new models in 2012(Toyota Avanza, Toyota Prius C-1.5 hybrid, Lexus GS series, Lexus RX series, Toyota Camry, Toyota 86 and Lexus LS series). On the other hand, the oil & gas division also witnessed a strong growth of 39.9% in revenue. The oil & gas segment has turned to the black in FY12 and contributed a profit of RM57.1m against a loss of RM245.9m in FY11. The full-year contribution from NAGA 3, additional revenue contribution from the Garraf Power Plant Phase 1 project and higher contribution from HAKURYU 5, a semi-submersible drilling rig were the main contributors to earnings growth.

28

4549 50 51

58 59

76 73

61 60 60 60

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80

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% of PAT

12.0 10.5

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50.056.4

62.367.1

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(sen)

Dividend payout ratio of 58% to 76% over the past five years

Higher revenue from the automotive (+18.8% y-o-y) and oil

& gas segment (+39.9% y-o-y)


18

Figure 26 : Revenue breakdown by segment (FY12) Figure 27 : PBT breakdown by segment (FY12)

Source: Company, Alliance Research Source: Company, Alliance Research

FY13 earnings would be driven by oil & gas division We believe intensifying competition in the automotive segment could result in higher sales & marketing expenses. On top of that, generous incentives coupled with rebate and financial deal to maintain high sales volume may also weigh on margins and earnings. We expect Toyota & Lexus sales to reach 106,000 units (-0.6% y-o-y) in FY13, to be slightly better than management’s forecast of 105,000 units. Historically, management has given very conservative guidance in-terms of sales volume. Nonetheless, the slowdown in the automotive segment will be offset by the strong growth in the oil & gas segment. We expect better earnings this year mainly driven by higher contribution from the drilling segment. Note that UMW will receive full year contribution from NAGA 1 after the completion of rig upgrading works on 18 Jan 2013, higher day rate for NAGA 2 and the maiden contribution from the new delivered jack-up rig, NAGA 4. Overall, we expect UMW to register a core earnings growth of 16.8% to reach RM1,097.7m in FY13 underpinned by 3.2% increase in revenue. Moderate earnings growth in FY14 and FY15 We expect revenue to grow at three-year CAGR of 4.4% between FY12 - FY15. We expect the revenue contribution from automotive will increased by 4.2% and 3.2% in FY14 and FY15, respectively. The completion of Perodua’s second manufacturing plant by mid-2014 will boost its capacity by another 50% or additional 100,000 units per annum. Note that the new plant will be running on a one-shift cycle compared to a two-shift cycle at the existing plant. Besides, the PBT contribution from oil & gas segment will increase by 57% and 23% in FY14 and FY15, respectively. The earnings growth is mainly supported by (1) full year contribution from NAGA 4 and the fifth jack-up rig (potentially to be named as NAGA 5), (2) higher charter rate for rigs, and (3) margin improvement. Note that NAGA 5 will be delivered in May 2014 and we had already factored in higher day rate and maiden contribution into our forecast. Overall, we expect 11.5% three-year earnings CAGR over the FY13 - FY15 period.

Automotive72%

Equipment14%

Manufacturing and Engineering

4%Oil and Gas

10%

Automotive88%

Equipment9%

Manufacturing and Engineering

0%

Oil and Gas3%

Slowdown in earnings growth due to competition in automotive

industry

Flattish TIV

Better earnings prospect from O&G

16.8% PAT growth

We expect moderate earnings growth in FY14 and FY15

Higher day rate and maiden contribution from NAGA 5


19

Figure 28 : Revenue breakdown (RM m)


Figure 29 : PBT breakdown (RM m)


Figure 30 : Segmental breakdown with forecast

* including adjustments and eliminations Source: Company, Alliance Research

0

5,000

10,000

15,000

20,000

FY09

FY10

FY11

FY12

FY13

F

FY14

F

FY15

F

Automotive Equipment Manufacturing & Engineering Oil and Gas Others

-250

250

750

1,250

1,750

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Automotive Equipment Manufacturing and Engineering Oil and Gas Others

FY09 FY10 FY11 FY12 FY13F FY14F FY15FRevenueAutomotive 8,347.3 9,935.8 9,699.0 11,498.1 11,595.9 12,080.4 12,472.8 Equipment 1,172.0 1,570.8 2,078.9 2,138.5 2,198.7 2,262.8 2,328.8 Manufacturing & Engineering 486.5 640.9 670.4 699.6 734.5 771.3 809.8 Oil and Gas 693.0 633.3 1,109.6 1,551.0 1,866.6 2,178.3 2,478.8 Others 22.1 39.4 (22.2) (23.5) (23.5) (23.5) (23.5)Total 10,720.9 12,820.2 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6

PBTAutomotive 738.2 1378.0 1547.9 1796.8 1803.2 1899.9 2000.9Equipment 83.5 103.9 70.5 183.5 202.6 201.0 201.4Manufacturing and Engineering 23.1 39.1 (11.9) 3.6 6.2 5.7 6.0Oil and Gas 37.7 (180.4) (245.9) 57.7 163.1 255.2 314.3Others (36.0) (27.4) 4.7 (31.8) (31.8) (31.8) (31.8)Total 846.5 1313.2 1365.3 2009.7 2143.3 2330.1 2490.9

PBT marginAutomotive 8.8% 13.9% 16.0% 15.6% 15.6% 15.7% 16.0%Equipment 7.1% 6.6% 3.4% 8.6% 9.2% 8.9% 8.6%Manufacturing and Engineering 4.7% 6.1% -1.8% 0.5% 0.8% 0.7% 0.7%Oil and Gas 5.4% -28.5% -22.2% 3.7% 8.7% 11.7% 12.7%


20

INVESTMENT RISKS Increase in raw material prices The risk of rising raw material price (i.e. steel and aluminium) could exert pressure on profit margins at automotive segment. Raw materials could accounts for more than one third of the cost of sales for the automotive segment. Fluctuation in currency The fluctuation of foreign exchange rates, particularly the US dollar (USD) against Malaysia Ringgit (MYR) will pose challenge to UMW as most raw materials and imported kits are purchased in USD. Thus, appreciation of USD can have a substantial impact on the group’s margin.

Figure 31 : Malaysian Ringgit (MYR) to 1 US Dollar (USD)

Source: Bloomberg Interest rate hike and credit tightening Interest rate hike will have a significant impact on the automotive industry as it will adversely affect buyers’ affordability which will lead to sluggish sales demand. Besides, macro-prudential lending measures implemented or to be implemented by Bank Negara Malaysia (BNM) such as credit evaluation using net pay, lowering of loan tenure etc would also negatively affect auto sales. Supply chain disruption risk Supply chain disruption due to natural catastrophes will have a huge impact on the global automotive industry. This can be observed from the Japanese tsunami/earthquake and flooding in Thailand in 2011, which have shown just how vulnerable global supply chains have become. Increase in cost of living Any increase in cost of living due to inflation (higher fuel prices, GST implementation, subsidy rationalisation) will lower the disposable income of potential car buyers. This will affect the demand for new vehicles.

2.90

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Raw material accounts for more than 1/3 of cost of sales

Currency fluctuation will pose challenge to UWW

Interest rate hike and macro prudential lending measures will

lead to slowdown in car sales

Supply chain disruption will have a huge impact on the global

automotive industry

Sharp increase in cost of living will adversely affect demand for new

cars


21

Sharp decline in crude oil prices and delay of contract awarded A sudden sharp decline in crude oil prices may contribute to the scaling back of capex spending and slowdown of contract award in the oil & gas industry. This would definitely exert some downside risk to earnings as the fixed cost (i.e. depreciation charge) will continue to weigh on margins.

VALUATION AND RECOMMENDATION Significantly outperformed FBMKLCI over the last 12 months As illustrated by Figure 33, UMW has significantly outperformed the FBMKLCI over the last 12 months. Its share price has appreciated by almost 85% since June 2012, indicating strong buying interest. We believe the strong performance was mainly due to the better financial performance, turnaround in the oil & gas segment and the potential listing of this division. Nonetheless, we believe further share price appreciation is now limited.

Figure 32 : Relative performances of local automotive players vs. FBMKLCI (1 June 2012 – 17 June 2013)

Source: Bloomberg, Alliance Research

Tan Chong

FBM KLCI

DRB

UMW

-10%

0%

10%

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70%

80%

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Sharp fall in crude oil price may lead in scaling back of O&G capex

UMW has significantly outperformed the FBMKLCI over

last 12 months


22

Initiate coverage with NEUTRAL call We believe that most of the positives have already been priced-in given UMW’s rich valuation. UMW is currently trading at CY13 and CY14 P/E of 16x and 14x, respectively which are at a premium to its local peer average of 11x-13x and regional peers average of 8x-14x. When compared to its historical P/E valuation, UMW is now trading at almost 2 standard deviations above its mean P/E of 12x. While we are positive on the long-term fundamentals of UMW, we believe tougher near term competition in the auto sector, especially in mid-to-high-end sedan segment, may negatively affect UMW and offset gains to be made in other segments. We use a sum-of-parts valuation methodology to value UMW’s diverse investments and businesses. Our valuation method yields a target price of RM13.60 per share (refer to Figure 34). This translates into a FY13 and FY14 P/E of 14.5x and 13.1x, respectively. The TP of RM13.60 implies a potential downside of -2.9% (after taking into consideration the dividend yield of 3.9%). With that, we rate UMW as NEUTRAL.

Figure 33 : Target price based on DCF based on FY14 estimates

Segments Net profit (RM m)

P/E (x)

Equity Value (RM m)

Automotive 857.8 12 10,293.5

Equipment 143.0 10 1,429.9

Oil and Gas 203.1 20 4,061.5

Manufacturing & Engineering 1.2 10 12.4

Others 8.7 9 78.5

Total Equity Value (RM m) 15,876

Number of shares (m)

1,168

Target Price (RM) 13.60 Source: Alliance Research

Most of the positives have already been priced-in given its rich

valuation

Initiate coverage with NEUTRAL call and TP of RM13.60


23

Appendix I

Figure 34 : Domestic automotive duty structure for CBU and CKD

* ID: Import duty, ED: Excise Duties, ST: Sales Tax Source: MITI

What is a CKD and what is a CBU? CBU – Completely Built Unit Completely built unit refers to a car/bike/automobile that is imported from another country as a fully assembled unit. These automobiles do not require an assembly before they can be sold out to the buyers in the target country’s markets. CKD – Completely Knocked Down Completely knocked down car / bike /automobile is one which is imported or exported in parts and not as one assembled unit. Such units are first sent to an assembly plant in the target country where all these parts are assembled and one complete car / bike / vehicle is made using the imported components. These kinds of units generate employment in the target country as more machinery and manpower investment is needed to assemble the components to make the vehicle.

Type/Engine Capacity (cc)

ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED ST ID ED STPassenger Vehicles< 1800 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10%≥ 1800 - < 2000 5% 80% 10% 5% 80% 10% 0% 80% 10% 0% 80% 10% 30% 80% 10% 30% 80% 10% 10% 80% 10% 10% 80% 10%≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10%≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10%> 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10%

≤ 1500 5% 60% 10% 5% 60% 10% 0% 60% 10% 0% 60% 10% 30% 60% 10% 30% 60% 10% 0% 60% 10% 0% 60% 10%> 1500 - < 1800 5% 65% 10% 5% 65% 10% 0% 65% 10% 0% 65% 10% 30% 65% 10% 30% 65% 10% 10% 65% 10% 10% 65% 10%≥ 1800 - < 2000 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10%≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10%≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10%> 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10%

< 1800 5% 65% 10% 5% 65% 10% 0% 65% 10% 0% 65% 10% 30% 65% 10% 30% 65% 10% 10% 65% 10% 10% 65% 10%≥ 1800 - < 2000 5% 75% 10% 5% 75% 10% 0% 75% 10% 0% 75% 10% 30% 75% 10% 30% 75% 10% 10% 75% 10% 10% 75% 10%≥ 2000 - < 2500 5% 90% 10% 5% 90% 10% 0% 90% 10% 0% 90% 10% 30% 90% 10% 30% 90% 10% 10% 90% 10% 10% 90% 10%≥ 2500 - ≤ 3000 5% 105% 10% 5% 105% 10% 0% 105% 10% 0% 105% 10% 30% 105% 10% 30% 105% 10% 10% 105% 10% 10% 105% 10%> 3000 5% 125% 10% 5% 105% 10% 0% 125% 10% 0% 105% 10% 30% 125% 10% 30% 105% 10% 10% 125% 10% 10% 105% 10%

Effect. 1.1.2007 Effect. 1.1.2007Effect. 23.3.2006 Effect. 1.1.2007 Effect. 23.3.2006

ASEAN (CEPT)CBU Vehicles CKD Component

Effect. 23.3.2006 Effect. 1.1.2007

Non ASEAN (MFN)CBU Vehicles CKD Component

MPV/Vans

4WD

Effect. 23.3.2006


24

Appendix II

National Automotive Policy (NAP) Framework The policy was formed on 19 October 2005 by the Prime Minister’s Department.

Objectives The policy is formed on the basis of the following 5 major objectives: To promote a competitive and viable automotive sector, in particular national car

manufacturers. To become a regional hub for manufacturing, assembly and distribution for automotive

vehicles. To enhance value added and local capabilities in the automotive sector. To promote export-oriented Malaysian manufacturers as well as component and parts

vendors. To promote competitive and broad-based Bumiputera participation in vehicle

manufacturing, distribution and importation as well as in component and parts manufacturing.

NAP 2006 Highlights Local assembly of luxury passenger above 1,800cc and priced above RM150,000 on-the-

road fully liberalised. Foreigners can own 100% of assembly operations. APs to be stopped by Dec 2015. Audit on AP recipients on-going and checks to be done.

Those flouting rules will be removed from list. Gradual introduction of Vehicle End of Life Policy. For starters, vehicles above 15 years

will have to undergo mandatory inspection during renewal of road tax. Import Duty structure maintained at 0% for CKD and 5% for CBU for AFTA. Excise duty structure remains. No changes. All imported used vehicles prices will be gazetted to prevent under-declaration. Manufacturing of critical components for cars such as brake system and transmission to

get tax incentives such as Pioneer Status/Investment Tax Allowance. The import of used parts/components will be prohibited from June 2011. Proton to establish strategic partnership with a global OEM. The current policy on the freeze of manufacturing licence for reconditioning and

reassembling (rebuilt) activities is maintained.

NAP Review 2009 Highlights Objectives from NAP 2006 were maintained but the following factors became the main focus of the review: Bring in more sophisticated latest technology into the domestic auto industry Draw up competitive safety standards and environmental-friendly opportunities Enhance implementation of the NAP plans

The following are the highlights of the review: All duties and taxes on CKD and CBU vehicles remain unchanged. Franchise AP system to be terminated by 31 Dec 31 2020. Open AP system to be terminated by 31 Dec 2015. RM 10,000 will be collected for each Open AP, starting 1 Jan 2010. AP holders will be audited twice a year. The Customs will maintain an official price list for used CBU vehicles to prevent under-

declaration of the prices of parallel imported vehicles.


25

Import of used vehicles will not be allowed after 2015. Import of used automotive parts to be banned from June 2011. Incentives will be provided to encourage the development of local automotive parts. Mandatory annual comprehensive inspection for vehicles aged 15 years or more before

road tax renewal. A detailed plan will be introduced further down the road to scrap old vehicles; vintage

vehicles will be exempted. Proton to form a strategic partnership with an established Original Equipment

Manufacturer (OEM). Manufacturing Licence (ML) can now be issued for selected vehicle types such as luxury

vehicles, hybrid and electric vehicles, trucks and commercial vehicles. No equity condition will be imposed in return for the ML. Incentives, in the form of tax breaks, duties exemption and grants, will be offered to

local assemblers and manufacturers of hybrid and electric vehicles.


26

Appendix III

Figure 35 : Toyota car models

Cars Toyota 86 Camry Corolla Altis Vios

MPVs Avanza Innova

SUVs & 4WD Rush Fortuner Hilux

Hybrid PRIUS c PRIUS

Van Hiace

Source: Toyota Website

Figure 36 : Perodua car models

Cars MPV Myvi Viva Alza

Source: Perodua Website

http://www.toyota.com.my/avanza/

http://www.toyota.com.my/innova/

http://www.toyota.com.my/rush/

http://www.toyota.com.my/fortuner/

http://www.toyota.com.my/hilux/

http://www.toyota.com.my/prius-c/

http://www.toyota.com.my/prius/











































































































27

UMW Holdings Berhad Financial Summary

Balance Sheet Income StatementFY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F

PPE 3,077.2 3,195.6 3,862.4 4,268.3 4,657.7 Revenue 13,535.8 15,863.6 16,372.2 17,269.2 18,066.6Intangibles 199.4 167.1 204.6 119.8 26.2 EBITDA 1,905.4 2,102.8 2,288.6 2,473.1 2,608.7Associates 1,424.4 1,565.2 1,565.2 1,565.2 1,565.2 Depreciation & amortisation (297.6) (285.5) (310.6) (345.0) (374.7)Inventories 1,518.9 1,396.1 1,518.9 1,834.5 1,869.2 EBIT 1,607.8 1,817.4 1,978.0 2,128.1 2,234.0Receivables 1,209.7 1,109.2 1,209.7 1,568.4 1,618.7 Net interest expense (12.6) (24.4) (25.4) (29.0) (22.5)Other assets 891.9 2,164.2 1,911.9 1,418.3 1,812.6 Share of associates 120.9 164.4 190.7 231.0 279.4Cash and bank ba lances 2,219.4 2,195.1 2,219.4 2,495.3 2,405.8 Pretax profi t 1,381.5 2,009.7 2,143.3 2,330.1 2,490.9Total Assets 10,541.0 11,792.4 12,492.1 13,269.8 13,955.3 Taxation (412.0) (431.6) (452.5) (492.1) (526.1)

Minori ty interest (467.5) (583.8) (593.1) (624.1) (658.0)LT borrowings 1,743.3 1,858.2 1,743.3 1,726.4 1,743.6 Net profi t 502.1 994.3 1,097.7 1,213.8 1,306.8ST borrowings 850.7 825.2 850.7 1,155.0 1,166.5 Core net profi t 836.7 941.9 1,097.7 1,213.8 1,306.8Payables 1,924.3 1,610.3 1,924.3 2,184.9 2,226.3 Other l iabi l i ties 444.6 1,221.1 1,124.7 727.7 671.9 Key Statistics & RatiosLiabilities 4,962.9 5,514.8 5,643.0 5,794.1 5,808.4 FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F

Share capi ta l 584.1 584.1 584.1 584.1 584.1 GrowthReserves 3,665.0 4,266.6 4,719.1 5,219.5 5,758.2 Revenue 5.6% 17.2% 3.2% 5.5% 4.6%Shareholders' equity 4,249.2 4,850.8 5,303.3 5,803.7 6,342.4 EBITDA 23.7% 10.4% 8.8% 8.1% 5.5%Minori ty interest 1,328.9 1,426.8 1,545.8 1,672.1 1,804.6 Pretax profi t 4.0% 45.5% 6.6% 8.7% 6.9%Total Equity 5,578.1 6,277.6 6,849.1 7,475.7 8,147.0 Net profi t -4.7% 98.0% 10.4% 10.6% 7.7%

Core EPS 42.1% 12.4% 16.5% 10.6% 7.7%Total Equity and Liabilities 10,541.0 11,792.4 12,492.1 13,269.8 13,955.3

ProfitabilityCash Flow Statement EBITDA margin 14.1% 13.3% 14.0% 14.3% 14.4%FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015F Net profi t margin 3.7% 6.3% 6.7% 7.0% 7.2%

Effective tax rate 29.8% 21.5% 21.1% 21.1% 21.1%Pretax profi t 1,365.3 2,009.7 2,162.8 2,349.4 2,506.7 Return on assets 4.8% 8.4% 8.8% 9.1% 9.4%Depreciation & amortisation 297.6 285.5 310.6 345.0 374.7 Return on equity 11.8% 20.5% 20.7% 20.9% 20.6%Change in working capi ta l (68.8) (388.2) (40.5) (55.3) (49.2) Net interest received / (pa id) (88.6) (101.4) (112.6) (113.7) (114.9) LeverageTax pa id (445.5) (424.1) (466.9) (495.7) (536.4) Tota l debt / tota l assets 0.25 0.23 0.21 0.22 0.21Others 247.9 (190.6) (23.4) 72.4 81.6 Tota l debt / equity 0.61 0.55 0.49 0.50 0.46Operating Cash Flow 1,307.8 1,190.9 1,829.9 2,102.1 2,262.5 Net gearing 0.09 0.10 0.07 0.07 0.08

Capex (673.7) (586.6) (1,000.0) (800.0) (800.0) Key DriversOthers 155.4 158.6 169.6 166.7 174.4 FY 31 Dec 2011A 2012A 2013F 2014F 2015FInvesting Cash Flow (518.4) (428.0) (830.4) (633.3) (625.6) Toyota & Lexus 88,662 106,622 106,000 109,180 111,364

Growth -3.6% 20.3% -0.6% 3.0% 2.0%Issuance of shares 81.9 11.9 - - - GDP growth 5.1% 5.6% 5.5% 5.7% 5.7%Changes in borrowings (141.5) 381.9 41.9 40.5 (134.0) Dividend pa id (733.4) (863.9) (1,148.9) (1,251.0) (1,290.6) ValuationOthers - - - - - FY 31 Dec (RM m) 2011A 2012A 2013F 2014F 2015FFinancing Cash Flow (793.0) (470.1) (1,106.9) (1,210.5) (1,424.7)

EPS (sen) 43.0 85.1 94.0 103.9 111.9Net cash flow (3.6) 292.8 (107.4) 258.2 212.2 Core FD EPS (Sen) 71.7 80.6 94.0 103.9 111.9Forex 18.5 (2.8) - - - Core P/E (x) 20.4 18.1 15.5 14.1 13.1Beginning cash 2,130.8 2,145.6 2,435.6 2,328.1 2,586.4 EV/EBITDA (x) 9.6 8.7 8.1 7.5 7.0Ending cash 2,145.6 2,435.6 2,328.1 2,586.4 2,798.6

Net DPS (sen) 31.0 50.0 56.4 62.3 67.1Net dividend yield 2.1 3.4 3.9 4.3 4.6

BVPS (RM) 3.64 4.15 4.54 4.97 5.43P/BV (x) 4.01 3.52 3.22 2.94 2.69

Price Date: 17 June 2013


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DISCLOSURE Stock rating definitions Strong buy - High conviction buy with expected 12-month total return (including dividends) of 30% or more Buy - Expected 12-month total return of 15% or more Neutral - Expected 12-month total return between -15% and 15% Sell - Expected 12-month total return of -15% or less Trading buy - Expected 3-month total return of 15% or more arising from positive newsflow. However, upside may not be sustainable Sector rating definitions Overweight - Industry expected to outperform the market over the next 12 months Neutral - Industry expected to perform in-line with the market over the next 12 months Underweight - Industry expected to underperform the market over the next 12 months Commonly used abbreviations Adex = advertising expenditure EPS = earnings per share PBT = profit before tax bn = billion EV = enterprise value P/B = price / book ratio BV = book value FCF = free cash flow P/E = price / earnings ratio CF = cash flow FV = fair value PEG = P/E ratio to growth ratio CAGR = compounded annual growth rate FY = financial year q-o-q = quarter-on-quarter Capex = capital expenditure m = million RM = Ringgit CY = calendar year M-o-m = month-on-month ROA = return on assets Div yld = dividend yield NAV = net assets value ROE = return on equity DCF = discounted cash flow NM = not meaningful TP = target price DDM = dividend discount model NTA = net tangible assets trn = trillion DPS = dividend per share NR = not rated WACC = weighted average cost of capital EBIT = earnings before interest & tax p.a. = per annum y-o-y = year-on-year EBITDA = EBIT before depreciation and amortisation PAT = profit after tax YTD = year-to-date


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