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Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Fri, 20 Sep 2019, 11:31 AM

 

Automotive - Historic Year in Rear-View Mirror

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We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for December 2018 registered sales of 48,188 units (0% MoM, -12% YoY). YoY sales growth was lower as the bulk of the demand was concluded during the tax-holiday period, affected by the delay in pricing approval for the new launches from authorities, and consumers holding back purchases for the new launches. Nevertheless, MoM car sales was able to stay at almost the same level as the previous month mainly due to the recovery in commercial segment sales (+17% MoM) as businesses stocked up for a new year. 2018 reported TIV of 598,714 units (+4%), higher than our expectation of 590,000 units (+2%) owing to higher-thanexpected sales by Perodua, surpassing its target of 209,000 units to close at 227,243 units (+11%). Nevertheless, we maintain our 2019 TIV target of 590,000 units (-1%), which is below MAA’s target of 600,000 units as we had factored in the possible delay in pricing approval for the new launches from authorities (5-7 months), absence of sales boosting factor i.e. the tax-holiday, and tepid purchasing power given the weak consumer sentiment. Our sector top-pick is MBMR (OP; TP: RM2.90) for its undemanding 7.2x FY18E PER compared with average net profit growth of 18% per annum over the next two years driven by its all-new Myvi (120k booking, c.100k delivered), and all-new Perodua ARUZ (booking at 2,200 units, RM73-78k, entry level SUV segment).

December 2018 registered sales of 48,188 units (0% MoM, -12% YoY). YoY sales growth was lower as bulk of the demand was concluded during the tax-holiday period, affected by the delay in pricing approval for the new launches from authorities, and consumers holding back purchases to wait for new launches. Nevertheless, MoM car sales was able to stay at almost the same level as the previous month, mainly due to the recovery in commercial segment sales (+17% MoM) as businesses stocked up for a new year.

Taking a detailed look at the passenger vehicles segment (-2% MoM, -12% YoY), Both MoM and YoY passenger car sales growth were lower mainly due to weak sales from Perodua (-13% MoM, -9% YoY) as Perodua was only focusing on production of the all-new Myvi to meet back-logged booking, as well as consumers holding back purchases on anticipation of the launching of all-new Perodua ARUZ (7-seater SUV). Nevertheless, MoM and YoY sales growth were cushioned by the Proton’s (+16% MoM, +17% YoY) all-new X70 (5-seater SUV, CBU) first batch delivery (at 2,000 units as of Jan 2019), as well as back-logged delivery of Nissan’s (+23% MoM, +67% YoY) all-new Serena S-Hybrid. Specifically, for 2018, passenger cars were at 74% share (2017: 72.9%), 4WD/SUVs at 13.5% (2017: 12.2%), MPVs at 11.9% (2017:14.4%), and windows vans at 0.6%(2017: 0.5%).

Expecting slower January 2019 sales. Sales volume for January 2019 is expected to be lower as bulk of the demand was already met during the tax-holiday period, and affected by the delay in pricing approval for the new launches from authorities as well as seasonally slower purchasing power after December year-end sales. Nevertheless, January sales will be supported by the initial delivery of exciting new launches that include the all-new Perodua ARUZ (entry-level SUV segment), Honda HR-V facelift (includes Hybrid), all-new Toyota Vios, and first batch delivery of all-new Proton X70.

We maintained our 2019 TIV target at 590,000 units (-1%). 2018 reported TIV of 598,714 units (+4%), higher than our expectation of 590,000 units (+2%) owing to higher-than-expected sales by Perodua, surpassing its target of 209,000 units to close at 227,243 units (+11%). Nevertheless, we maintain our 2019 TIV target of 590,000 units (-1%), which is below MAA’s target of 600,000 units as we had factored in the possible delay in pricing approval for the new launches from authorities (5-7 months), absence of sales boosting factor i.e. tax-holiday, and tepid purchasing power given the weak consumer sentiment (3Q18 MIER consumer sentiment index scored 107.5 pts (-25.4pts QoQ, +30.4pts YoY), and expected to be below the optimistic threshold (>100pts) in the coming quarters.

Delay in pricing approval for the new launches due to tax incentives? With the new SST gazetted on 1st September 2018, vehicles are charged 10% sales tax. Nevertheless, the prices for the locally-assembled and Completely-Knocked-Down (CKD) units have dropped by 1% to 3% (compared to 6%-rated GST), whereas prices for the Completely-Built-Up (CBU) units have increased by 1% to 3%. The price decrease in locally-assembled and CKD units was attributed to the better compliance of Industrial Linkage Programme (ILP) regulation, which provides incentives and duty exemption to the original equipment manufacturers (OEMs) that use local components (under National Automotive Policy 2014). We believe that the delay in pricing approval for the new launches is due to the stringent approval process for the tax incentives in pricing the CKD models undertaken by the Automotive Business Development Committee (ABDC). MITI will organize a dialog with MAA to expedite the process which positively will improve the new launches timeline. We made no changes to our assumptions for now pending further development and significant impact of the new launches.

MBMR (OP; TP: RM2.90) is our sector top pick, with or without an M&A angle for: (i) its deep value stake in 22.58%-owned Perodua (based on: our FY18E profit, attached 12x PER value, MBMR’s stake at c.RM1.4b), and (ii) expected a strong turnaround in the alloywheel division segment underpinned by the all-new MyVi and the all-new Perodua ARUZ (entry-level for SUV segment). The stock is trading at an undemanding 7.2x FY18E PER compared with average net profit growth of 18% per annum over the next two years. We increased our FY18E and FY19E NPs by 5% and 6%, respectively, to account for the higher-than-expected sales volume for its associates, Perodua premised on all-new Perodua Myvi and all-new Perodua ARUZ (expected to sell at c2k units/month). As such, we increased our TP to RM2.90 from RM2.60 previously. Reiterate OUTPERFORM.

Source: Kenanga Research - 18 Jan 2019

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