1. Investment Highlights/Summary
- NHF is involved in the manufacturing of metal and plastic automotive body parts for the replacement market.
- NHF’s niche position in auto body replacement market provides a steady and relatively less volatile earnings stream. The sizeable local car population of 9.6m cars provides a steady demand for its range of products for the domestic market.
- The current investment in new products and plans to expand into overseas markets underpins the sustainability of its future earnings stream.
- Excluding goodwill impairment, NHF is currently trading at a P/E of only 6.2x based on our EPS forecast of 38.5 sen for FY12. We have arrived at a target price of RM3.00, based on a target P/E of 8x for FY12.
- Not only is the stock is trading below its NTA of RM3.30, it also comes with an attractive dividend yield of 5.5%.
2. Company Background/Overview
- History
The Group was founded in 1977 by the late Chairman cum Managing Director, Kam Lang Fatt @ Kim
Leng Fatt. The founding trading company, New Hoong Fatt Auto Supplies Sdn Bhd (NHFAS) has carved
a niche in the local automotive replacement parts market through its efficient services and wide range of
products.
NHF ventured into the manufacturing of metal automotive body replacement parts such as door, hood,
fender and trunk lid in 1989 through the setting-up of a wholly-owned NJ Metal Stamping Sdn Bhd (now
known as NJ Manufacturing Industries Sdn Bhd). In 2000, NHF set-up a factory to manufacture plastic
automotive replacement parts such as bumpers, grilles, door mirrors and door handles to become a more
complete manufacturer of metal and plastic automotive parts. The Group has since grown to become
leading player in genuine and alternative automotive replacement body parts in Malaysia.
NHF made its debut on the then Second Board of Bursa Malaysia (previously known as KLSE) in 1998.
The listing of NHF was transferred to the Main Board in 2001.
Corporate structure
Note: only active subsidiaries are shown
- Key areas of operation
NHF is principally involved in the following activities:
- Manufacturing of metal and plastic automotive body replacement parts
o Metal parts – hood, fender, door, panel, radiator support, trunk lid
o Plastic parts – lamps, bumper, grille, mirror, door handle
- Manufacturing of tools, moulds and dies; and
- Wholesaling, marketing and trading of motor vehicle parts and accessories in the replacement market of both local and export markets.
More than 2,000 items are manufactured in-house. In addition to its own manufactured products, NHF
also sources parts and accessories from other local and overseas manufacturers. NHF is also the sole
distributor of USA lubricant, 76 Lubricants and Motor Oils for Peninsular Malaysia.
NHF is headquartered in Klang, Selangor with 4 branches in Gombak (opened in 1977), Sg Besi (1994),
Segambut (2005) and Kota Kinabalu (2007) to service its extensive distribution network of more than
1,000 wholesalers, retailers and vehicle repair shops throughout Malaysia.
NHF’s products are sold to domestic market and exported to over 50 countries in ASEAN, the Middle-
East, Pakistan, Central and South America, Taiwan, China, India, Africa and Russia. Exports accounted
for around 23% of group revenue in FY10.
3. Management and Board:
- Kam Foong Keng, Executive Chairman
> Appointed as Executive Director in Apr-1998 and was later re-designated as Deputy Managing Director in Oct-2007 and finally as Executive Chairman in May-2008
> Overseeing strategic direction, overall performance and business development
- Chin Jit Sin, Managing Director
> Appointed as Executive Director in Apr-1998 and was later re-designated as Managing Director in
Oct-2007
> Attached to banking institution prior to joining NHF
> Overseeing strategic planning and operational management
- Kam Foong Sim, Executive Director
> Appointed as Executive Director in May-2001
> Member of the Certified Practising Accountants Australia and the Malaysian Institute of Accountants
> Overseeing finance and accounts
4. Financial Review
Historical Net Profit and Gross Margin Performance
> NHF differs from other domestic auto parts manufacturers as it caters mainly to the replacement market.
> Unlike other auto parts players, NHF’s historical gross margin and net profit base had been relatively
resilient and has been on an increasing trend. NHF’s performance in previous recessions and economic
downturns demonstrates that it is relatively insulated from fluctuations in the economy and new motor
vehicle sales.
> The growing pool of passenger cars on the road is the main turnover growth drivers for the
replacement market. NHF’s niche segment in auto body replacement market provides a steady and
relatively less volatile earnings stream.
> Its historical profit growth was driven by the following reasons:
o Increase in product range of both metal and plastic automotive parts;
o Growing pool of passengers cars;
o Acquisition of Hoeken Industrial Sdn Bhd which elevated its net profit base to RM22.5m in
FY04 from RM15.8m in FY03; and
o Penetration of new export markets
> Since FY08, in compliance with FRS, NHF has impaired its goodwill amounting to RM5.7m (FY08),
RM5.3m (FY09) and RM4.9m (FY10) due to declining economic benefits from the cash generating
unit. This goodwill, which is a non-cash item, is related to the acquisition of Hoeken Industrial Sdn
Bhd. We have assumed another goodwill impairment of RM4m each in our earnings forecast for FY11
and FY12.
5. Recent Developments
- In Mar-2011, wholly-owned PT. NHF Auto Supplies Indonesia was incorporated for the marketing,
distribution and trading of automotive spare parts in Indonesia.
- In Jun-2011, NHF obtained approval from the Ministry of Commerce in China to set up a whollyowned
Ampire Auto Parts (Shanghai) Co. Ltd for importing, exporting and trading of automotive spare
parts and accessories in China.
- On 26-Aug-2011, NHF announced the completion of the disposal of the entire 60% indirect stake in
New Kean Tat Auto Parts Sdn Bhd (NKT) for RM3.6m cash. Impact to NHF’s profit is negligible as
NHF’s share of net profit of NKT only amounted to RM0.6m in FY10.
- In Nov-2011, NHF announced a restructuring exercise involving its wholly-owned manufacturing
subsidiaries whereby the business of NJ Manufacturing Industries Sdn Bhd (NJ) and Jhi Soon
Manufacturing Industries Sdn Bhd (JS) would be transferred to Auto Global Parts Industries Sdn Bhd
(AGP). Upon completion, AGP would become the flagship company to manufacture and market metal
and plastic automotive parts, and both NJ and JS would cease operations.
6. Industry Landscape/Overview
NHF differs from other domestic auto parts manufacturers as it caters mainly to the replacement market. The
local replacement market for auto body parts can be divided into the genuine and alternative parts markets.
While the local and overseas vehicles manufacturers are the main source of genuine parts, alternative
replacement parts are either imported or supplied by local manufacturers. Generally, the alternative parts
pricing is cheaper as compared with genuine parts.
7. Competitive Analysis
NHF possesses some competitive strengths due to the following factors:
- Economies of scale. NHF is capable of providing a wide range of auto body parts with the availability
of tooling and mouldings. This has become a key barrier to new entrants as the building of a range of
tooling, mould and die is capital intensive and time-consuming, and requires a high level of technical
competency. Over the past 5 years, for FY 06 to FY10, NHF invested RM112m in total capex, which
included RM79.7m for the purchase of machineries, tools and dies;
- NHF is equipped with inhouse tooling, mould and die capability, technical competency and
engineering design capability;
- Disparity in product pricing. The domestic auto body replacement market is mainly made up of
genuine parts (supplied by vehicle assemblers), imported parts and alternative replacement parts. NHF
commands pricing advantage as the company’s auto body parts are generally 50% cheaper than
genuine parts at the wholesale prices. At the retail price level, NHFs price differential would be even
larger; and
- Comprehensive distribution network of more than 1,000 wholesalers and distributors throughout
Peninsular Malaysia, Sabah and Sarawak.
There is no direct comparison amongst the listed auto parts players as all of them are pre-dominantly original
equipment (OEM) players. Unlike OEM auto parts manufacturers, whereby turnover growth is tied to new vehicle sales, NHF’s business is fully dependent on the replacement market and exports. In addition, its peers such as Delloyd also has a sizeable plantation business.
8. Earnings Outlook
- NHF’s earnings stream has proven to be resilient given its focus on automotive replacement parts. As
at end-Sep-2011, the total number of registered passenger cars in Malaysia, as compiled by the Road
Transport Department amounted to 9.6m cars, creating a steady demand for its range of products for
the domestic market.
- NHF plans to replicate its entrenched domestic position in the automotive replacement market overseas
to take advantage of the continued liberalisation of the AFTA. Since 2010, all import duties are
eliminated for automotive trades within ASEAN 6 (Brunei, Indonesia, Malaysia, Philippines,
Singapore and Thailand). This allows NHF to tap into a much larger population base of 580m within
the ASEAN. The wholly-owned subsidiary, PT. NHF Auto Supplies Indonesia is established to drive
its expansion into the automotive replacement market in Indonesia.
- NHF plans to expand more aggressively towards export markets. In this context, it will continue to
invest heavily in tooling, mould and die to expand its new product pipelines for overseas markets.
9. Key Investment Risks
- The raw materials used in its manufacturing process are steel sheet and plastic resin. Hence, the rising
prices could adversely affect its profit margin if input cost increase could not be passed-on. As
illustrated in the gross margin chart above, NHF’s gross margin had been relatively steady ranging
from 27-29% despite the fluctuation in commodity prices and economic downturn.
- If economy slows down severely, consumers might delay their spending on repairs.
- Most of the steel sheet and plastic resin are quoted in US$. However, there is some form of natural
hedging as export sales which are quoted in US$, accounted for 23% of its turnover in FY10.
10. Dividend Policy
NHF does not have a dividend policy but it had been consistently paying dividend to reward its shareholders
since its IPO in 1998. In FY10, it declared a total dividend of 13 sen/share, which translates into a net yield of 5.5%.
Despite the continuous investment in new product development, plant and machineries, we believe the dividend payment can be maintained, supported by the projected EBITDA of RM52m for FY11, which is sufficient to cover the capex and dividend payment of about RM30.0m and RM9.8m respectively.
Historical Dividend Payment And Payout Ratio
11. Balance Sheet
Despite the need to maintain high capex of about RM30m to expand its new products pipelines, NHF should
still remain in a strong balance sheet position thanks to its strong EBITDA. NHF turned into net cash position
as at 3QFY11, providing it the financial flexibility to expand its product lines and export markets.
12. Valuation and Recommendation
We initiate coverage on NHF with a Buy recommendation for the following reasons:
- NHF’s niche position in auto body replacement market provides a steady and relatively less volatile
earnings stream. The sizeable local car population of 9.6m cars provides a steady demand for its range
of products for the domestic market.
- The current investments in new products pipeline and plan to expand into overseas markets will
underpin future earnings.
- Excluding goodwill impairment, NHF is currently trading at a P/E of only 6.2x based on our EPS
forecast of 38.5 sen for FY12. We have arrived at a target price of RM3.00, based on a target P/E of
8x for FY12.
- Not only is the stock is trading below its NTA of RM3.30, it also comes with an attractive dividend
yield of 5.5%.
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