Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Mon, 13 Jul 2020, 9:57 AM


Automotive - National Marques’ Affirming the Lead

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We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment index scored 85.6 pts (-11.2pts QoQ, -5.4pts YoY) in 1Q19 which is below the optimistic threshold (>100pts) due to muted growth post the zero-rated tax holiday as well as post-year end sales and is expected to record only marginal improvement in subsequent quarters due to tepid purchasing power. Nevertheless, we believe that consumers are turning to value-for-money (volume-driven sales) national marques, while non-national marques are focusing on higher-margin lower-volume models (catering to higher-purchasing power consumers). Notable developments in Automotive industry in 2019 include: (i) National Marques surpassed Non-National marques’ market share, (ii) Proton expected to surpass Honda as no.2 trailing behind Perodua in total industry market share TIV powered by the all-new Proton X70, supported by upcoming all-new and face-lifted models, (iii) increasing number of new model launches, and (iv) introduction of third national car under National Automotive Policy 2019. No changes to our 2019 TIV target of 600,000 units matching MAA’s target factoring the extra boost from national marques (Proton and Perodua). Our sector top-pick is MBMR (OP; TP: RM3.45). Our other preferred pick is BAUTO (OP; TP: RM3.00).

National marques affirming leading market position. As of 5M19, the national marques (56%) continued to stay above non-national marques (44%) in terms of market share, marking a year not seen since 2013, attributed to the outstanding sales from Perodua, especially after the introduction of its all-new Perodua Myvi and supported by the all-new Perodua Aruz (25k bookings, 13k delivered). This volume was also boosted by a surge in Proton sales, after the introduction of its allnew Proton X70 (30k bookings, 14.9k delivered), and supported by fresh new facelifted, improved technological variants of existing line-ups (Iriz, Persona, and Exora). Proton will be launching an all-new X70 CKD in 2H19, while in 2020, an allnew X50 (based on Geely Binyue) and Proton/Geely Jiaji (MPV) are in the pipeline. On the other hand, Perodua plans on launching an all-new SUV in 2H2020, probably a 5-seater version, indirectly competing against Proton X50. Notable changes include Honda targeted lower sales for 2019 at 95,000 units, versus 102,282 units sold in 2018. The marque’s 2018 market share was 17.1% premised on Honda City (32%), Civic (16%) and CR-V (13%). Nevertheless, the reported 5M19 sales showed Honda losing market share – down to 15%, just slightly above Proton at 14%. Moving forward, we expect a stronger growth for National Marques, hence, we upgrade DRBHCOM to MP from UP with a TP of RM2.20 from RM1.80 based on revised sum-of-parts (refer to overleaf table) to factor in the stronger contribution from Proton, and we downgrade TCHONG to MP from OP with a lower TP of RM1.60 from RM2.15 based on a lower targeted PER of 10x (refer to overleaf table) to factor in its diminishing market share, especially in non-national marques.

National marques improved sales volume, while Non-nationals achieved better margin sales in 1Q19. In 1Q19, only 2 out of the 6 stocks (BAUTO, SIME) performed above expectation while 3 stocks (MBMR, TCHONG, and UMW) were within expectation. One (DRBHCOM) was below expectation. Overall, Perodua-linked companies (UMW, MBMR), recorded stronger performance mainly from the higher associates’ contribution buoyed by all-new Perodua Myvi and Aruz, as well as supported by better core segments. BAUTO and TCHONG recorded higher margin sales, while SIME saw stronger sales of Industrials and DRBHCOM‘s stronger 4Q Automotive contribution was mitigated by weakness in its other segments.

Looking forward to 2HCY19. As expected, 2QCY19 car sales were stronger than 1Q19 on the usual Hari Raya Aidilfitri promotional activities. Looking forward to 3QCY19/4QCY19, overall car sales volume for 3QCY19 is expected to be weaker than 2QCY19 but to recover with a better sales number on 4QCY19 from the usual year-end promotion and new model launches. Nevertheless, we expect that overall, 2H19 sales to be supported by better financing rate as banks have cut their Base Lending Rate (BLR) by 20-25bps. Recent new launches include Proton X70, Perodua ARUZ, the face-lifted Honda HR-V (includes Hybrid), face-lifted Proton IRIZ and Persona, Toyota Vios, Toyota Yaris, Toyota Rush, T32 Nissan X-Trail facelift (April 2019) and 2019 Proton Exora RC. Upcoming new launches include the all-new A90 Toyota GR Supra (2H19), Mazda CX-8 (CKD, 2H19), Mazda CX-30 (CBU, 2H19), and Proton X70 (CKD).

We maintain our 2019 TIV target at 600,000 units (+0.2%). We maintain our 2019 TIV target at 600,000 units, in-line with MAA’s target. We believe the absence of one-off 2018 tax holiday will be offset by exciting new launches in 2019. Note that, we have factored in a possible delay in new launches’ timing given the backlog of pricing approvals from the authorities (to 3-5 months, improving from 5-7months, previously), absence of sales boosting tax-holiday, and tepid purchasing power. The Ministry of International Trade and Industry (MITI) has decided to increase the frequency of the monthly meetings held by the Automotive Business Development Committee (ABDC), which is chaired by MITI, from once to twice a month to speed up the vehicles pricing approval process. On the other hand, MITI has established a trade and advisory council (TIAC), which will play a crucial role in shaping the ministry’s policies, strategies and potential reforms in international trade as well as investment promotion and industry development. The council will discuss issues on subjects ranging from foreign direct investment (FDI) and domestic direct investment (DDI) to the National Automotive Policy (NAP) in its upcoming meetings, with a minimum of four meetings to be held annually.

Source: Kenanga Research - 4 Jul 2019

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Chart Stock Name Last Change Volume 
MBMR 3.14 0.00 (0.00%)
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SIME 2.15 0.00 (0.00%)
TCHONG 1.12 0.00 (0.00%)
UMW 2.60 0.00 (0.00%)
DRBHCOM 1.80 0.00 (0.00%)

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