Investment Highlights

• 1Q2019 results were largely in line with expectations. The automotive and auto parts sector had a decent start to the year, where 33% of core earnings of all companies under our coverage exceeded our estimates while another 67% were in line with our expectations. Positive surprises that resulted in an upward earnings revision under our coverage came from the two conglomerates i.e. Sime Darby and DRB-Hicom. Sime Darby’s profits exceeded our expectations on the back of strong deliveries of Caterpillar equipment due to the upturn of the Australian mining industry. Going forward, we are positive on the group’s industrial segment as the miners have increased their expenditures for equipment replacements as well as for expansions in Australia. The group guided that there is a 9-month to 1-year lag for the deliveries of equipments ordered by the miners, in preparation for another 2-3 years of expansion of the mining cycle before it reaches its peak. The group’s industrial order book stood at RM2.6bil at the end of the quarter, hence this will provide a strong demand for the industrial equipments. We also upgraded DRB-Hicom to HOLD on better days ahead for the group with a brighter outlook for Proton supported by Geely as its key collaborative partner. We saw an improvement in the group’s automotive segment after a convincing swing back into black in FY19. We believe this will continue in the foreseeable future as Proton has a slew of new launches ahead. Adding to it, recall that Proton has secured the intellectual property (IP) and rights to manufacture and sell up to 4 Geely cars for 5 years under the partnership. Proton sold 18.2K units in 1Q2019 compared with 12.8K units in 1Q2018.
• 1Q2019 vs. 1Q2018. 1Q2019 registered a total TIV sales of 143.0K units vs. 135.1K units in 3M18, translating to a healthy 6% YoY growth. This was mainly driven by better sales performance in the national car segment of Proton and Perodua. Proton recorded an impressive 42% YoY growth with 18.2K units sold in 3M19 with the X70 accounting for about 47% of the total sales volume. Perodua also achieved better sales numbers of 60.7K units (+9% YoY), backed by the volumebased models of Axia and Myvi. Approval rate for loans has improved to an average of 62.9% in 1Q19 vs. 55.8% in 1Q18. The average approval rate for loans in 2018 was 59.6%. Overall in 1Q2019, net core earnings of the automotive companies grew by 22% QoQ and 67% YoY to RM584.7mil underpinned by higher vehicle sales. The only YoY decline in our automotive coverage was APM Automotive, where core earnings fell 29% due to poorer performance from five out of seven of the group’s core operating segments. However, on QoQ basis, core earnings declined for most companies in 1Q2019 due to seasonally lower vehicle sales in February. To recap, February’s TIV dipped (-18% MoM, -2% YoY) due to the CNY holidays as well as a relatively shorter working month. This is not surprising, and the seasonal factor has resulted in lower sales volume across most major marques. The QoQ fall in Pecca’s earnings in 1Q2019 was due to the payout of employees’ annual salary increments in 1QCY2019.
• National marques surged ahead of non-national players’ market share in 1Q2019. Since 2014, the non-national marques have always marginally surpassed national marques in terms of market share on a full-year basis. However, as at 4M19, we witnessed a radical change in the sector for the first time since 2014, where the national marques’ market share climbed above that of the non-national marques (56% vs 44%). This was driven by the ongoing strong demand and deliveries of Perodua’s third generation Myvi (2017) and the popular Proton X70 SUV. Perodua recorded an YTD (4M19) sales of 82.8K units (+9.7% YoY) and is progressing well to achieve its 2019 sales target of 231.0K units (+1.7% growth). Meanwhile, the X70 has received a total booking of 30.0K units with 14.0K units delivered after its introduction in mid-December 2018. We believe that the national marques’ sales volume will continue to be strong and steady going forward underpinned by new launches; i.e. recent facelifts of the Iriz, Exora and Persona and the upcoming launches of the Saga and X50. These models are very affordably priced and are catered for the mass market (volume-oriented), targeted towards consumers in the low-medium income group.

Source: AmInvest Research - 11 Jun 2019