• Bank Negara Malaysia has reduced the overnight policy rate (OPR) by 25bps to 3.00% on Tuesday. It highlighted that the adjustment to the OPR was intended to preserve the degree of monetary accommodativeness amidst signs of moderation in economic activity from a slowdown in global demand and growth of key trading partners. The central bank has reduced the ceiling and floor rates for the OPR to 3.25% and 2.75% respectively.

• The 25bps cut in interest rate is not expected to significantly impact the sales of vehicles. We believe that on the purchase of big-ticket items such as cars, the bigger challenge for consumers will be the upfront 10% down payment. The 25bps reduction in interest rate is not likely not to ease consumers’ burden on the initial down payment.

• As a simulation, let’s assume an individual buying a car for RM70K with a repayment term of 7 years. After factoring in a 10% down payment of RM7K, the monthly repayments pre- and post-25bps reduction in OPR will be minimal as shown below:

Monthly repayment @ 3.50% interest rate = RM933.75

Monthly repayment @ 3.25% interest rate = RM920.63

• Based on the above back-of-the-envelope calculation, the reduction in monthly repayment is only a mere RM13.12. Hence, the minimal interest savings are not likely to drive consumers to purchase vehicles.

• We believe that this rate cut will not be a catalyst for growth in the automotive sector, unlike the 3-month tax holiday in 2018.

• The Malaysian automotive industry continues to face headwinds with lingering issues and is expected to remain challenging in a competitive business environment. We look forward to the anticipated revised National Automotive Policy 2019 (NAP 2019), expected to be announced in 2Q19 which will set the long-term direction of the automotive ecosystem, and will also include the direction of the third national car development.

• For now, we will be maintaining our TIV projection of 603K units for 2019 (+0.8% YoY). The sector is currently lagging with no major catalysts after receiving a boon from the tax holiday in 2018. Growth in 2019 TIV will very much depend on the performance of key players, namely Perodua, Honda, Toyota and Nissan. We have BUYs on Bermaz Auto (BAuto), Pecca Group, MBM Resources and Tan Chong Motor. Our HOLD calls are on Sime Darby, UMW Holdings and DRB-Hicom while we are UNDERWEIGHT on APM Automotive.

Source: AmInvest Research - 8 May 2019