• Sept 2018 TIV declined 52% MoM and 24% YoY to 31.2K units. This was the poorest monthly sales seen in at least 7 years. The drop was not surprising as most buyers would have secured their purchases during the “tax holiday”. The massive MoM drop was seen for all major players: Perodua (-47%), Honda (-54%), Toyota (-66%), Nissan (-43%) and Mazda (-38%).

• YTD sales were 7% higher YoY as the tax holiday provided a significant uplift. The three-month tax holiday accounted for 44% of YTD sales. We reiterate our believe that it would 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 declines in sales volume ahead.

• Perodua and Honda remained the leaders by market share. The two reaped market shares of 37% and 34% for the YTD period respectively (Honda’s share is of the non-national side only). The results did not significantly change from the 36% in market share that both companies recorded for 2017. The big improvement was seen in Mazda whose market share improved to 5% in the YTD period from 3% in 2017. Mazda sales rose 58% YTD period as the previous corresponding period of Jan-Sep 2017 was marked by poor sales of below 1K/month, prior to the uplift contributed by the new CX-5 from Oct 2017.

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

1) Perodua’s MoM drop of 47% to 9.5K units was exacerbated by the supply disruption in the Myvi. The result is noticeably worse than the average of 19.8K units/month seen in the prior months. Recall that the company had warned of poor Sep sales earlier this month. The supply disruption began in August. This was only a short-term issue as the production for Myvi was back to normal in Oct. Perodua’s sales should begin to normalize from this month supported by the 22K in unfulfilled orders for the Myvi it had as of end-Sep.

2) Toyota’s MoM dropped of 66% to 3K units which was worse than its peers. Nonetheless, we believe it had done the best job at maximizing sales during the tax holiday, during which the average sales of 9.8K/month more than doubled the average of 4K/month seen prior. Toyota registered the highest YTD growth among its peers (of 7% for the Jan-Sep period; vs. Honda’s 1% YoY and Nissan’s 0%), with sales from the tax holiday making up 56% of its YTD sales (vs. Honda’s 44% and Nissan’s 47%).

3) Mazda saw healthy sales of 1.2K in Sep. The 38% MoM drop was largely due to the high base of 1.9K units in Aug, when SUV sales had doubled on a MoM basis to compensate for the poor result in July. Mazda SUV sales accounted for 83% of its total sales in Sep, and the recent addition of the CX-3 and M6 facelifts should provide crucial support for the coming months.

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

• We maintain a TIV projection of 2-3% for 2018 and 2.0% in 2019. We have BUYs on Bermaz Auto (BAuto), Pecca Group, MBM Resources and Tan Chong Motor. The MAA is projecting for a TIV growth of 1.5% this year to 585K units, implying projected average sales of 40.3K units in the last 4 months of 2018.

• 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 and (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; and (3) a visible tightening by banks on auto financing to constrain the demand for cars.

Source: AmInvest Research - 17 Oct 2018