CBU vs CKD in MALAYSIA CAR

Autos: Much ado about import duties

Business & Markets 2013

Written by theedgemalaysia.com   

Tuesday, 05 March 2013 09:51

Automotive sector 

Maintain overweight: The reduction of import duties on completely built-up units (CBUs) from Japan should have limited impact on the automotive landscape since the process has been ongoing since 2006. We estimate that CBU prices will fall by only 2% to 5% per year on a gradual removal of duties from now to 2016.

Our “overweight” call on the sector is unchanged. We make no change to our forecasts and recommendations. Our top pick is UMW HOLDINGS BHD []. Its premium valuation of 11 times 2013 price-earnings ratio (PER) is justified by its strong earnings momentum. Sector catalyst is Asean market integration.

There has been a lot of publicity about the gradual removal of import duties on vehicles from Japan and Australia under their respective free trade agreements. Under the scheme, import duties which currently stand at 30% will gradually be abolished by 2016 on a sliding scale. However, we understand the process of abolishing import duties on Japanese vehicles started in July 2006 under the Malaysia-Japan Economic Partnership Agreement.

Import duties were at 45.5% in 2006 and now stand at 30% after undergoing scheduled cuts every year, and we are moving towards the complete removal of such duties by 2016.

Since the process of cutting import duties on CBUs from Japan has been ongoing for some time, it is highly unlikely that this will have a big impact on the auto industry as it enters its final few rounds of cuts. Our scenario analysis, based on the remaining cuts till 2016, shows that CBU prices will go down between 2% and 5% per year. The pricing differential between CBUs and completely knocked downs (CKDs) is due to excise duties on non-local content which range between 75% and 105%, and the government has given no indication that it will dismantle these.

CBUs account for 9% of total industry volume (TIV) and we estimate 58% are Japanese, but most of the units come from Asean. We estimate only 16% of these CBUs are imported directly from Japan, representing 0.8% of TIV. Its limited relevance is unlikely to change. We continue to look at UMW as the prime proxy for the Malaysian auto sector. — CIMB Research, March 4

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