Kenanga Research & Investment

Author: kiasutrader   |   Latest post: Tue, 24 Nov 2020, 10:33 AM


Automotive - National Marques Racing Ahead

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We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment index scored 93.0 pts (+7.4pts QoQ, -39.9pts YoY) in 2Q19 which is below the optimistic threshold (>100pts) due to muted growth post the zero-rated tax holiday. Reflecting this, we are seeing car sales trending in favour of value-for-money national marques. Non-national marques on the other hand, 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 surpassing Non-National marques’ market share, (ii) Proton is expected to surpass Honda as no.2 trailing behind Perodua in total industry market share TIV powered by the all-new Proton X70, and supported by all-new and face-lifted models, (iii) increasing number of new model launches, and (iv) introduction of the third national car under National Automotive Policy 2019 by year-end. 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 BAUTO (OP; TP: RM2.75) which offers a steady dividend yield of 7.2%

National marques affirming leading market position. As of 8M19, 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, 20.3k delivered). This was also boosted by a surge in Proton sales, after the introduction of its all-new Proton X70 (30k bookings, 20.4k delivered), and supported by fresh new face-lifted, improved technological variants of existing line-ups (Iriz, Persona, and Exora). Proton will be launching an all-new X70 CKD in 4QCY19, while in 2020, an all-new X50 (based on Geely Binyue) and Proton/Geely Jiaji (MPV) are in the pipeline. On the other hand, Perodua plans launching an all-new SUV in 2H2020, probably a 5- seater version, indirectly competing against Proton X50. Notable changes include Honda targeting 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 8M19 sales showed Honda losing market share – down to 15% with Proton closing in to the same position. Moving forward, we expect a stronger growth for National Marques, hence, we upgrade DRBHCOM to MP from UP with unchanged SoP-derived TP of RM2.60. DRBHCOM’s share price has plunged 17% since our last downgrade to UP call and we believe that much of the negatives have been priced in at this juncture. National marques improved sales volume, while Non-nationals achieved better margin sales in 2Q19. In 2Q19, overall mixed performances, with 3 out of the 6 stocks (BAUTO, MBMR, and SIME) performing above expectations while 2 stocks (DRBHCOM and TCHONG) were below expectations. One (UMW) was within expectation. Perodua-linked companies (UMW, MBMR), recorded stronger performance mainly from the higher associates’ contribution buoyed by the all-new Perodua Myvi and Aruz, as well as supported by better core segments. BAUTO and TCHONG recorded higher margin sales, but TCHONG disappointed due to higher effective tax rate and poor contribution from its local operation while SIME saw stronger Industrials performance and an unexpected push from Automotive segment. DRBHCOM recorded dismal profit compared to previous quarter especially from slowing Proton X70 sales at the tail end of CBU deliveries (-23% QoQ).

Looking forward to 2HCY19, vehicles sales volume for 3QCY19 is expected to be weaker than 2QCY19 in the absence of festivities and due to the higher base for Hari Raya Aidilfitri promotional activities. Nonetheless, we expect 4QCY19 sales to make up for the rest of the year, boosted by the usual year-end promotion as well the anticipation of another cut in Base Lending Rate (BLR) by 20-25bps (In November 2019), to meet our year-end target of 600,000 units, in-line with MAA’s target. YTD new launches include 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, 2019 Proton Exora RC, Mazda 3 (Sedan & Hatchback), face-lifted Perodua Axia, all-new A90 Toyota Supra (CBU), face-lifted Mazda CX-5 (30th September 2019), and Mazda CX-8 (1st October 2019). Upcoming new launches include the, face-lifted Honda Accord, Mazda CX-30 (CBU, 2H19), and Proton X70 (CKD). There are also a stream of unannounced all-new launching waiting for pricing approvals and better incentives program under NAP 2019.

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 sales-boosting event such as the one-off 2018 tax holiday will be offset by exciting new launches in 2019 and we have also factored in possible delays in new car launches given the backlog of pricing approvals from the authorities (3-5 months), and tepid purchasing power. MITI has decided to increase the frequency of the monthly meetings held by the Automotive Business Development Committee (ABDC), chaired by MITI, from once to twice a month to speed up the vehicles pricing approval. On the other hand, MITI has established a trade and advisory council (TIAC), which 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/year).

Source: Kenanga Research - 3 Oct 2019

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