The sector’s 1QCY23 results saw improved earnings delivery vs. three months ago. Most automotive players under our coverage recorded higher sales driven by new models, increased deliveries backed by production ramp-up and better margins due to lower input costs. We maintain our CY23F TIV of 720k which will match the record level achieved in CY22, underpinned by: (i) sustained consumer confidence, (ii) affordability of motor vehicles, and (iii) attractive new models. The industry’s earnings visibility is strong, backed by a booking backlog of 275k units. Our sector top picks are MBMR (OP; TP: RM4.60) and BAUTO (OP; TP: RM2.90), both with attractive dividend yields of about 7%. Reiterate OVERWEIGHT.

Turbo-charged results. The recently concluded 1QCY23 results saw improved earnings delivery vs. three months ago, with 33% of the results coming in above, 50% within, and 17% below, versus 50% within, and 50% below in 4QCY22. Most automotive players under our coverage recorded higher sales driven by new models, increased deliveries backed by production ramp-up and better margins due to lower input costs.

BAUTO and DRBHCOM performed above expectations on higher blended margins with product mix skewed towards highmargin models. On the other hand, MBMR, UMW and TCHONG met expectations. Meanwhile, SIME disappointed on prolonged margin compression at its auto business in China which negated brisk equipment sales particularly in Australia on its economy reopening, and commodities boom.

BAUTO was driven by robust demand for high-margin all-new Mazda, Peugeot and Kia vehicles, while DRBHCOM benefitted as Honda Malaysia’s production recovered on the sales of high-margin Honda HR-V. Its upcoming new production of the allnew Honda WR-V will fill the void in Honda offerings of small-SUV, by 3QFY23. On the other hand, strong showing from manufacturing associate Perusahaan Otomobil Kedua Sdn Bhd on high production volume and lower input costs negated the lower seasonal sales for MBMR and UMW. TCHONG, however, still suffered losses albeit at reduced level due to: (i) the lack of new launches while its competitors have flooded the market with attractive new models, and (ii) its inability to raise prices to pass on rising production cost especially with the weakening of MYR against USD.

Upbeat on sales volume. We maintain our CY23 TIV projection of 720k units that will match the record level achieved in CY22. Our optimism is underpinned by: (i) strong consumer confidence supported by a stable economy and a healthy job market, (ii) the affordability of motor vehicle underpinned by stable new car prices thanks to the deferment of new excise duty regulations (that could have resulted in prices of locally assembled vehicles increasing by 8%-20%) and potentially cheaper hire purchase cost with the introduction of reducing balance method in the calculation of interest charges, and (iii) attractive new models. Our projection is about 11% higher than the 650k units projected by Malaysian Automotive Association (MAA). The industry’s total booking backlogs have held up at a fairly strong level of 275k units compared to bookings of 300k units three months ago despite heavy deliveries. This indicates sustained strong buying interest, lured by attractive new model launches by players. We foresee a similar pattern throughout the rest of the year.

Our sector top picks are:

• MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 190k units (almost half of its CY23 target sales of 314k units), (ii) it being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia, as well as its 22.58% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its attractive dividend yield of about 7%.
• BAUTO for: (i) its strong earnings visibility backed by an order backlog of 8k units for Mazda, Kia and Peugeot vehicles (half of its CY23 target sales of 19k units), (ii) its premium mid-market Mazda brand that offers the best of both worlds, i.e. products that appeal to the middle-income group and yet command superior margins than its peers in the mid-market segment, and (iii) its attractive dividend yield of about 7%.

Source: Kenanga Research - 9 Jun 2023