Investment Highlights

• We maintain our OVERWEIGHT recommendation on the auto sector with a TIV projection of 565K units for 2020.

• We expect TIV in 2H2020 to be supported by improved performances across the board for all major automakers with the implementation of the short-term National Economic Recovery Plan (Penjana), entailing a 100% and 50% sales tax (SST) exemption on locally assembled (CKD) and fully imported (CBU) car models respectively from 15 June 2020 until 31 December 2020.

• Below are our expectations for the sector in 2H2020:

1. A recovery in sales in 2H2020 boosted by SST exemptions. Going into 2H2020, we are expecting a strong recovery over the next 6 months as the number of domestic Covid-19 new cases is easing and most businesses have resumed operations (with the considerations of the new norm). The government has also relaxed the movement control order (MCO), where all dealerships, showrooms and Road Transport Department outlets are now able to take in booking orders and registrations for new vehicles. The SST exemptions have resulted in reduced car prices of 1.1–6.5% for cars across the board for all automakers. We strongly believe that this is a very much needed shot in the arm for local vehicle sales, which is similar to the 3- month tax holiday in June–August 2018. Recall that the zero-GST “tax holiday” in 2018 resulted in a 3–5% 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). We expect a similar trend from this SST exemption over the next 6 months. We believe that these key names under our coverage will benefit from the SST exemption stimulus more than the others, as explained below:

• With Proton and Perodua’s entire line-up being locally assembled CKDs, the prices of their product offerings are even more affordable post-SST exemption. We strongly believe that Proton and Perodua will continue to lead the auto sector in 2H2020 due to their more attractive pricings for their line-ups and value propositions compared to their peers (i.e. X70 vs. X-Trail/CR-V; Aruz vs. BR-V). With that, we maintain BUYs on DRB-Hicom (FV: RM2.49/share) and MBM Resources (FV: RM4.62/share) as they are proxies to Proton and Perodua’s performances in the auto sector.

• We also have a BUY recommendation on Bermaz Auto (FV: RM1.79/share), premised on the sharp recovery of earnings from a very low base in FY20. Note that Bermaz Auto’s FYE is in April, which means that we will be able to see the impact of the SST exemption fully reflected in the group’s FY21F. Based on our estimates, we are expecting a 49% earnings growth for the company in FY21F. 2. Expect two attractively-priced national SUVs to debut in 2H2020. We are expecting a debut of two key model launches in 2H2020 –the Proton X50 and Perodua D55L. From our channel checks, we gather that the both of them are B-segment 5-seater SUVs and we anticipate both models to be more attractively priced compared to the other non-national B-segment SUVs. Taking a cue from the Proton X70, the upcoming Proton X50 will also be another Geely-inspired model and we expect the latter to also be similarly equipped with level 2 automation and better infotainment systems for an improved driving experience while being competitively priced. We expect both the Proton X50 and Perodua D55L to have a strong showing on their debut in the local market in 2H2020.

With that, we believe that both national automakers will continue to extend their lead in the competition for market share in 2H2020 as their products provide a better value for money due to their appealing features and more attractive pricings.

3. Lower financing rates to be supportive of purchase of vehicles. The OPR has been reduced by 100bps cumulatively in the 1H2020. We see this as helpful in easing consumers’ burden in monthly loan repayments as well as lowering the financing rates to attract the purchase of new vehicles.

4. Weaker ringgit poses a key concern to company’s profitability margins. The further weakening of the ringgit will be negative for the sector and auto players in our coverage should there be further cuts to the interest rate. Key companies that will be more negatively impacted from a weaker ringgit include Tan Chong Motor, 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 heightened costs, consequently squeezing their profitability margins.

5. Inventory level of companies to ease as consumer demand for passenger cars increases in 2H2020. We note two key companies that have elevated inventories, which are Tan Chong Motor (due to unattractive product line-up and uncompetitive pricings) and Bermaz Auto (unable to deliver their products due to the MCO – resulting the group to be in a net debt position for the first time in years). Tan Chong Motor and Bermaz Auto’s inventory levels stood at RM1.4bil and RM680mil respectively. With the SST exemption stimulus, we expect an uptick of consumer demand for passenger vehicles and we believe that both Tan Chong Motor and Bermaz Auto will be able to take this opportunity to reduce their inventory levels. We expect Bermaz Auto to return to a net cash position in 2H2020.

• Potential risks that could prompt a downgrade to the sector to NEUTRAL/UNDERWEIGHT are: (1) a rise in the number of new Covid-19 cases which will induce another lockdown; (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; and (3) a tightening by banks on vehicle financing which will directly constrain the demand on cars.

• Our top pick for the sector is MBM Resources (FV: RM4.62/share). We think that MBM Resources is currently undervalued, trading at 6.3x FY21F EPS, compared to the sector average of 11.2x. We strongly believe that the group will continue its strong showing as a direct proxy to Perodua’s dominance in the local automotive sector.

• We also have BUYs on Bermaz Auto (FV: RM1.79/share), DRB-Hicom (RM2.49/share) and Sime Darby (FV: RM2.40). We maintain our HOLD recommendations on Pecca Group and UMW Holdings; while we have UNDERWEIGHT on Tan Chong Motor.

Source: AmInvest Research - 6 Jul 2020