Investment Highlights

• We upgrade the auto sector to OVERWEIGHT from NEUTRAL with a 60K increase in total industry volume (TIV) projection to 580K units for 2020 (+12% from our previous estimate of 520K units and -4% vs 604K in 2019). This follows PM Tan Sri Muhyiddin Yassin’s announcement on 5 June 2020 of the short-term National Economic Recovery Plan (June–December 2020) (Penjana), entailing a 100% and 50% sales tax (SST) exemption on CKD locally assembled and CBU fully imported car models respectively from 15 June 2020 until 31 December 2020. Presently, CBU and CKD passenger cars attract 10% sales tax.

• We believe that this is a shot to the arm to local vehicle sales, similar to the 3-month tax holiday during June to August in 2018. Recall that the zero-GST “tax holiday” in 2018 resulted in a 6% cut in car prices across the board, significantly spurring demand for new cars with a total sale of 198.5K units for that quarter (+42% QoQ, +32% YoY). Our estimates show that the incremental car sales were about 20K cars per month (vs. no tax holiday) during the 3-month period. Taking our cue from this and also having considered the softer economic condition at present vs. that in 2018, we forecast incremental sales of 10K per month over the next six months.

• We strongly believe that prices of entry-level locally assembled passenger vehicles are poised to be more attractive. With that, we believe that Proton and Perodua will continue to lead the way in 2020 due to their attractive pricings for their line-ups and value propositions with their product fleet being locally assembled.

• Based on our channel checks, the 100% SST exemptions will result in a reduction of 7–8% of CKD car prices, while the 50% SST exemptions will reduce CBU car prices by 3–4%. Exhibit 1 shows the present retail OTR prices that included some dealership margins and handling fees on top of the SST and excise duties calculations.

• With that, we expect the 100% SST exemptions to reduce CKD car prices more than those during the zero-GST period. We also think that the low interest rate environment will be attractive and improve consumer sentiment into leaning towards new car purchases.

• We have already rolled over some of the valuations of the companies under our coverage to FY21. We believe that the measure to reduce the SST in the economic recovery plan will be positive on the earnings of companies in the auto sector. We are increasing our earnings projection and valuations for all auto companies as follows:

1. MBM Resources: We maintain our BUY recommendation with a higher FV of RM4.62/share, pegged to an FY21F PE of 8x (from RM3.59/share pegged to a FY21F PE of 7x previously). We increase our FY20F net profit forecast by 15% to reflect higher Perodua sales volume for the year.

2. DRB-Hicom: We maintain BUY with a higher SOP-derived FV of RM2.49/share (from RM1.87/share previously). We increase our FY20F net profit forecast by 7% to reflect higher Proton and Honda sales volume for the year.

3. Sime Darby: Maintain BUY with a higher SOP-derived FV of RM2.40 (from RM2.21 previously). We raise our FY21F net profit by 9% to reflect higher BMW sales volume in the Malaysia market. Note that the SST exemption will fully impact Sime Darby in FY21F as the group’s financial year-end is in June.

4. Bermaz Auto: We are upgrading BAuto to BUY from UNDERWEIGHT with a higher FV of RM1.79/share, pegging the stock to an FY21F PE of 13x (from RM0.82/share pegged to a FY21F PE of 9x previously). We increase our FY21F net profit by 21% to reflect higher sales volume for the group’s domestic market. Note that the SST exemptions will only fully impact BAuto in FY21F as the group’s financial year-end is in April.

5. UMW Holdings: We maintain our HOLD call with a higher SOP-derived FV of RM2.56/share (from RM1.74/share previously). We increase our FY20F net profit forecast by 27% to reflect higher Toyota and Perodua sales volume for the group’s domestic market. The group owns 38% stake in Perodua (associate company).

6. Pecca Group: We are upgrading Pecca to HOLD from UNDERWEIGHT with a higher FV of RM0.76/share, pegged to an FY21F PE of 10x (from RM0.55/share pegged to a FY21F PE of 8x previously). We increase our FY21F net profit forecast by 9% to reflect higher OEM sales volume for the year. Note that the SST exemptions will fully impact Pecca in FY21F as the group’s financial year-end is in June.

7. Tan Chong Motor: We maintain our UNDERWEIGHT recommendation with a higher FV of RM0.71/share, pegged to an FY20F PE of 9x (from RM0.50/share pegged to a FY20F of 7x previously). We increase our FY20F net profit forecast by 11% to reflect higher Nissan sales volume in the Malaysian market.

8. APM Automotive: We maintain our SELL recommendation with a higher FV of RM1.37/share, pegged to an FY20F PE of 9x (from RM1.09/share pegged to an FY20F PE of 7x previously). We increase our FY20F net profit forecast by 9% to reflect higher sales of local auto parts. We will roll over our valuation to FY21F when the group releases its 1QFY20 results later this month.

Source: AmInvest Research - 8 Jun 2020