• Bank Negara Malaysia (BNM) has reduced the overnight policy rate (OPR) by 25bps to 2.75% yesterday. The central bank said that the adjustment to the OPR is a preemptive measure to secure the improving growth trajectory amid price stability. BNM has reduced the ceiling and floor rates for the OPR to 3.00% and 2.50% respectively.

• The 25bps cut in the interest rate is not expected to significantly impact the sales of vehicles. We believe that in 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 @ 3.25% interest rate = RM920.63 Monthly repayment @ 3.00% interest rate = RM907.50

• Based on the above estimates, the reduction in monthly repayment is only a marginal RM13.13. Hence, the minimal interest cost savings are not likely to spur a sudden consumer interest to purchase vehicles. We strongly believe that this rate cut will not be a catalyst for growth for the automotive sector, unlike the 3-month “tax holiday” in 2018.

• We maintain our NEUTRAL stance on the auto sector. We have introduced a TIV projection of 610.0K units for 2020. Our top picks for the auto sector are MBM Resources (FV: RM5.54) and DRB-Hicom (FV: RM3.18) as we expect Perodua and Proton to continue their strong showing in 2020, commanding pole position and runner up respectively in terms of TIV market share.

Source: AmInvest Research - 23 Jan 2020