• Still NEUTRAL. While TIV data for 1Q24 was unsurprisingly strong, webelieve that car sales should normalise in the months ahead, given the lack ofcatalysts to prop up vehicle sales and push it to another record high. BermazAuto (BAUTO) remains our Top Pick, on its undemanding valuation, relativelyresilient car sales and attractive 10% dividend yield.

• Competition in the local EV sphere heating up? A few new EV models havebeen launched in Malaysia since early 2024 – these include the BYD Seal,Chery Omoda E5, the MG4 EV and GWM Ora 07 – on which prices rangefrom MYR104k to MYR200k a unit. Consequently, a few existing models inthe same price range underwent price reductions by 4-19%. As new EV salesare still lacklustre (1.3% of total TIV), anymore new EV launches within thesame price range would further intensify competition.

• Employees Provident Fund (EPF) account restructuring – is this good or badfor the sector? We believe withdrawals from the new, third EPF account (ieAkaun Fleksibel) will not likely flow to purchasing big-ticket items, consideringthe marginal 2.3% increase in Malaysians’ disposable income. On top of that,only MYR4-5bn is expected to flow to the economy annually as a result of thewithdrawals, which is significantly lower than the MYR145bn withdrawn by8.1m EPF account holders under different pandemic-related withdrawalprogrammes. Hence, the withdrawal amount per member this time aroundwould be lower.

• Subsidy rationalisation and civil workers’ salary increments. We think theimpact of subsidy rationalisation on the auto sector would mainly be on themid-market segment, as the low-income group is still expected to benefitfrom subsidies while high-income earners should be less affected by theending of subsidies. However, we are positive on the salary revisions for civilworkers, as the >13% increment would be sufficient to entice consumers tospend on major purchases. However, we make no changes to our earningsassumptions for now, as the general sentiment on the sector remainssubdued, given the uncertainty related to subsidy rationalisation.

• What to expect ahead? Major marques such as Perodua and Toyota sawtheir order backlogs easing to 128k and 28k as at end-Dec 2023 from 190kand 52k units in May 2023. Also, the loan approval rate for vehicle purchasesin YTD-2024 is 58% (2022-2023: 62-63%) while gross loans for vehiclepurchases have risen by only 2.7%, despite TIV rising by 5%. This may implytighter lending requirements as well as downtrading activities by consumers.Coupled with looming inflationary pressures, we believe car sales willcontinue to recede in the coming quarters, as sales volumes after a recordhigh year normalise. For 2Q24, we anticipate TIV to be seasonally weakerQoQ given the Aidil Fitri holidays and the scheduled factory maintenanceshutdowns by major marques.

• While the 1Q24 TIV figure makes up >30% of our 2024 TIV assumption of625k units, we believe the current TIV levels are not sustainable, given thelack of drivers to boost sales to a new high after two record-breaking years.Therefore, we maintain our TIV forecasts and NEUTRAL sector weighting fornow. We prefer automotive names with cheap valuations with strongearnings growth visibility. Our Top Pick is BAUTO.

• Key downside risks include softer-than-expected orders and deliveries, andresurgent supply chain issues. The opposite represents the upside risks.

Source: RHB Securities Research - 6 May 2024