Investment Highlights

• We are NEUTRAL on the automotive sector with a TIV projection of 603K units (+0.8% growth) for 2019. We strongly believe that growth in 2H19 TIV will depend on the performance of national marques i.e. Proton and Perodua. YTD, Perodua and Proton contributed 42% and 14% respectively to total TIV in 5M19. Other volumeoriented players in the non-national segment which can help boost the sector’s growth include Honda and Toyota.

• The automotive sector still lacks major organic growth catalysts after the tax holidays in 2018. Here is our take on the sector in the upcoming 2H2019:

1) Competition to intensify in the SUV segment; national SUVs to further threaten Mazda and Honda in their niche. Going forward in 2H2019, we expect competition in the SUV segment to intensify as we continue to see strong bookings and demand for the Aruz and X70. In fact, we are already witnessing how the introduction of both models has chipped away Honda and Mazda’s domination in the local SUV space. Mazda’s SUV market share took a dive to 7.9% YTD 2019 from 17.5% in 2018 while Honda’s SUV market share dipped to 24.5% YTD 2019 from 30.8% in 2018. (YTD = 5M2019)

In 5M2019, the introduction of the Perodua Aruz and Proton X70 has captured a substantial market share of 22.3% and 23.3% respectively in the SUV segment.

2) A shift in consumer preference towards cheaper alternatives, ultimately lifting national marques’ sales volume in 2H2019. In 2019, we are witnessing a shift in the general consumer’s preferences towards cheaper alternatives as more are favouring national cars. With that said, we expect the national marques to continue spearheading the local automobile sector as they provide similar alternatives at more affordable price tags. Also to a certain extent, these cheaper alternatives offer better value for money.

For instance, the Iriz, Persona and X70 have advanced digital infotainment systems and an advanced voice recognition software, which are Wi-Fi enabled for mobile hotspot capabilities. The X70 is priced at RM123.8K vs. its direct competitor Honda CR-V at RM163.2K while the Perodua Aruz is RM72.9K vs. the Honda BR-V at RM90.7K. While it is arguable that the X70 is the superior option with more to offer, consumers are generally convinced that the national marques (X70 and Aruz) are the better choices with greater value for money. Hence, we strongly believe that the national marques will continue to register stronger sales volume, capturing a majority of TIV market share going forward in 2019.

We also look forward to the localization of the X70 as we expect to see a price reduction with the introduction of the CKD version and this continue to support the demand for the popular SUV. As a switch from a CBU to CKD model will result in a reduction in import duty to 10% from 30% (see Exhibit 3), we are expecting at least an approximately 20% reduction in pricing after the launch of the CKD version.

3) Upcoming new launches in 2H19. BAuto has a slew of upcoming new launches throughout 2019, namely the Mazda 3 (July), CX-5 Turbo (September), CX-3 facelift (December), the all-new CX-30 CBU (December), and the long-awaited 7-seater SUV CX-8 (October). We also look forward to the upcoming launches of Proton Saga (est. end-June) and the all-new Honda Civic 2019 (August).

• Potential catalysts that could come into play for an upgrade of the sector are:

A) A potential further strengthening of the ringgit. The ringgit has strengthened slightly throughout June 2019 from RM4.19 to the current level of RM4.14: US$1.00 amidst the global market’s expectation of a 25bps rate cut by the US Federal Reserve. Going forward, should the ringgit continue to strengthen, it will ultimately be positive for the sector and automotive players in our coverage. Companies that will benefit from a weaker dollar will be Tan Chong, UMW Holdings and Pecca Group as a substantial amount of their COGS are denominated in USD at 60%, 40% and 40% respectively. Ceteris paribus, this will lead to cheaper costs, consequently improving their net earnings.

Source: AmInvest Research - 17 Jul 2019