KUALA LUMPUR (April 24): Analysts predict a decline in earnings for Malaysian automotive companies in 2024, attributed to lower sales volumes and higher operating costs, coupled with the emergence of several Chinese original equipment manufacturers (OEMs) offering attractive pricing.

Analysts covering the sector kept their ‘neutral’ stance, as they estimated total vehicle sales to dip below the Malaysian Automotive Association’s estimate of 740,000 units this year. 

Hong Leong Investment Bank (HLIB) sees total industry volume at 720,000 units this year, while Kenanga Investment Bank predicts that 710,000 units will be sold.

HLIB foresees a slowdown in sales volumes due to softening order backlogs, coupled with the aggressive entry of Chinese OEMs, intensifying competition for the existing OEMs.

Kenanga, meanwhile, pointed out that fuel subsidy rationalisation could dampen demand for mid-market car models, particularly impacting the middle 40% household income group, as they may delay purchasing new vehicles or opt for smaller cars to reduce their fuel expenses. 

Malaysia plans to reduce petrol subsidies this year, aiming to narrow the fiscal deficit to 4.3% of gross domestic product from 5% in 2023. The government plans to phase out blanket subsidies for RON95 fuel, the country's most commonly used and affordable gasoline, which constituted a significant portion of the RM81 billion spent on subsidies last year.

Despite these challenges, analysts note potential upside growth from exciting new model launches in late 2023 and in 2024, and more aggressive sales and marketing activities to sustain sales by various OEMs.

The analysts' top picks are MBM Resources Bhd and DRB-Hicom Bhd, due to their strong leverage of national OEMs like Proton and Perodua. These groups are expected to benefit from more stable sales volumes and potential long-term growth through exports.

Shares in MBM Resources hit a record high of RM4.95 earlier this month. As at 12.04pm on Wednesday, its shares had risen one sen or 0.21% to RM4.87, giving the group a market capitalisation of RM1.90 billion.

The counter has risen over 16% year-to-date, and 32% in the past year. 

DRB-Hicom’s share price, meanwhile, was unchanged at RM1.36, valuing it at RM2.63 billion. 

There are four 'buy', six 'hold' and one 'sell' calls on MBM Resources, with a 12-month target price (TP) of RM4.60, according to Bloomberg, followed by two 'buy' and two 'hold' ratings for DRB-Hicom, with a 12-month TP of RM1.70. 

https://www.theedgemarkets.com/node/709145