Investment Highlights

• Aug 2018 TIV was down 4% MoM and up 27% YoY at 65.6K units. The marginal MoM drop was contributed by several top volume-oriented players – Perodua, Honda and Toyota with their sales peaked in one of the two months prior to August. Perodua’s substantial MoM drop (of 25% from July) was due to a supply disruption (on the dashboard mould for the Myvi) which led to 3K of orders for the model being pushed past August. We reiterate that Perodua should still be supported by its strong backlog (only 57% of the 120K in bookings for the new Myvi had been fulfilled at end-Aug), with proxies such as UMW Holdings, MBM Resources and Pecca Holdings to benefit.

• YTD sales were 10% higher YoY as the “tax holiday” provided a significant uplift. We maintain a TIV projection of 2- 3% for 2018 and 2.0% in 2019. Average sales of 66K units/month during the tax holiday period met our expectation, and we believe it will take at least 4 months for sales to normalize to its previous average of 45K/month. Companies will likely be forced to rely on new launches or incentives to mitigate some of the exceptional decline in sales volume ahead.

• We note the following points from the August sales figures:

1) Mazda shot up to a historical high of 1.9K in Aug to compensate for its dip in the previous month. Strong SUV sales of 1.5K in Aug (double the previous month’s) continued to anchor Mazda, which should also see support from the CX-3 and M6 facelifts introduced in Aug.

2) Nissan and Proton, previously the laggards, were the distinct performers with an upward trajectory in sales seen in the three months of the tax holiday. We note that both companies were lacking major catalyst for sales, and saw depressed numbers with the lowest sales in the months prior to the general election. While most players saw sales spike from the tax holiday, the improvement was exceptional for Proton and Nissan which saw the monthly sales average improved to 89% and 86% as a result (vs. TIV’s 47%). Nissan also rode on strong orders for the new Serena MPV and is making a strategic shift away from its earlier focus on growing by volume, while Proton will count on the new SUV marked for October to hold up sales in the post-SST period.

3) Perodua should course-correct from next month. The carmaker faced a supply disruption and announced a cash rebate as compensation on the 3K units of the Myvi pushed for delivery from the end-August. We understand that the supply of the dashboard mould should resume normally from mid-September. The new Myvi is still seeing strong orders even as it comes to mark the close of its first year, and we believe sales in the coming months should still be formidable even though lower than Perodua’s peak of nearly 24K seen in July. We project 2.5%/3.0% sales growth for Perodua in FY18/19.

• Car prices are expected to go up by a small quantum with the SST reintroduced in September at 10%. We note that the biggest beneficiaries during the tax holiday will also be the companies that would to see the most decline in sales volume thereafter as opportunistic buyers would have secured their car purchases earlier.

• We maintain a TIV projection of 2-3% for 2018 and 2.0% in 2019. We have a BUY on Bermaz Auto (BAuto), Pecca Group, MBM Resources and Tan Chong Motor. MAA is projecting for a TIV growth of 1.5% this year to 585K units, implying a projected average sales of 40.3K units in the last 4 months of 2018. On our BUY calls: BAuto is expected to see better domestic sales, margins and associate earnings; Pecca remains a key beneficiary of Perodua’s success as the sole supplier of its leather seats, MBM could start to see better valuations as the cloud on its loss-making alloy wheel unit dissipates, and Tan Chong has started to find its footing after two years of losses.

• We have HOLDs on Sime Darby, APM Automotive, UMW Holdings and DRB-Hicom.

• The catalyst for an upgrade on the sector to OVERWEIGHT would be a visible recovery in auto sales. This would rely on: (1) better consumer sentiment to drive the demand for new cars; (2) companies to be in a stronger financial position to catalyze demand with new models and better market visibility; (3) a better macroeconomic environment to ease the obtaining of financing for a new car. Conversely, we may downgrade the sector to UNDERWEIGHT if: (1) sales erode further on a severe decline in consumer sentiment; (2) a steep weakening of the ringgit that threatens companies' margins and necessitates price hikes; (3) a visible tightening by banks on auto financing to constrain the demand for cars.

Source: AmInvest Research - 21 Sept 2018