Investment Highlights

• We maintain our NEUTRAL stance on the automobile sector with a TIV projection of 610.0K units (+1.1% growth) for 2020. We expect TIV growth in 1H20 to be supported by a sustained strong performance of national marques i.e. Proton and Perodua.

• Other than the occasional festive and year-end promotions, the automobile sector still lacks major organic growth catalysts after the GST exemption period in 2018. Below are our expectations for the sector in 1H2020:
  • ​​​​​​​1. Stiffer competition in the B-segment passenger car space. Going into 1H2020, we expect competition to intensify in the B-segment passenger car division as there will be several new launches which include the all-new Honda City CKD, all-new Honda Jazz CKD and the all-new Nissan Almera CKD. As these models are expected to enter the local auto market within a short period of time, they will provide consumers with wider options, thus likely to slow down the demand for Toyota passenger cars i.e. the Yaris and Vios which were launched in 2019. This could lead to the possibility of UMW Toyota dishing out price discounts to hold up sales volume thus affecting profitability margins for its automotive segment.
  • 2. Non-national SUVs to remain uncompetitive in 2020. We expect an influx of a few key SUVs in 2020, namely the Nissan Kicks, Mazda CX-3 CBU, Proton X70 CKD, Proton X50 CKD and the Honda CR-V. We anticipate the national SUVs to be priced more attractively compared to the non-national SUVs. Out of all the aforementioned models, the Proton X70 and X50 are well-equipped with level 2 automation, have more competitive pricings and better infotainment systems for a better driving experience. With that, we believe that the non-nationals are likely to lose more market share to national marques in 2020 due to their lack of features and unappealing pricing. With consumer sentiment remaining weak as evidenced by the MIER’s Consumer Sentiment Index which remained low (Exhibit 1), we believe that the market for vehicles in the premium segment will continue to be soft in 2020. In our coverage universe, the strongest impact will be on Bermaz Auto (BAuto) due to its pricier SUVs. Going forward, we believe that there is a need for the group to focus more on its export business via its 30%-owned MMSB, exporting to neighbouring countries under two flagship products, the CX-5 and CX-8.
  • 3. Upcoming National Automotive Policy (NAP) likely to further benefit Perodua. The upcoming NAP 2019 is expected to further push for initiatives to make Malaysia a regional hub for energy-efficient vehicles (EEVs). This direction could potentially see further excise duties exemptions or customized incentives be accorded to carmakers that comply with EEV standards. If this materializes, we believe that it will benefit Perodua which has the highest concentration of EEV-certified models. This change could improve its product pricing competitiveness and expand its sales volume. Hence, we continue to like MBM Resources and UMW Holdings which hold strategic stakes in Perodua.
  • Besides Perodua, various models from other marques such the Mazda CX-5, Mazda CX-8, Toyota Vios, Honda City, Jazz and the Civic, the Proton X70 and the upcoming Proton X50, which comply with EEV standards, may also stand to benefit from any change in duties or incentives.
  • 4. Another OPR cut in the offing? Our house view holds that there could be another OPR cut to 2.75% in 1Q2020. We strongly believe that the 25bps cut in interest rates is not expected to significantly impact the automobile sector or sales of vehicles. In the purchase of big-ticket items such as cars, any reduction in interest rates is not likely to ease consumers’ burden in monthly loan repayments.
     
• Potential catalysts that could come into play for an upgrade of the sector to OVERWEIGHT include: (1) the government’s initiatives to reduce excise duties across the board, which will in turn increase the number of affordable cars thus spurring demand for vehicles.
   
• Conversely, potential risks that could prompt a downgrade are: (1) a continuing decline in consumer sentiment resulting in decreased overall vehicle sales; and (2) heightened global trade tensions which will lead to a steep weakening of the MYR against the USD, threatening companies’ margins and necessitating price hikes to maintain profitability levels.

• Our top picks for the sector are MBM Resources (FV: RM5.54), DRB-Hicom (FV: RM3.18) and Pecca Group (FV: RM1.46). We think MBM Resources is currently undervalued, trading at 7.6x FY20F PER, compared to the sector average of 12.6x. We believe that the group will continue to perform well as it is a direct proxy to Perodua’s dominance in the local automotive space.
• For DRB-Hicom, we see value gradually emerging with Proton’s vast improvement in earnings in a short span of time. We strongly believe that valuation of the stock remains attractive based on Proton’s successful turnaround that has yet to be fully priced in.
• Lastly, Pecca Group is also another key beneficiary of Perodua’s supremacy in the sector as the sole supplier of its leather seats. The group’s plans to obtain the licence to provide OEMs/REMs for non-national aircraft could see its revenue improving

Source: AmInvest Research - 7 Jan 2020