Investment Highlights

• We maintain our OVERWEIGHT stance on the auto sector with a 40K increase in TIV projection to 600K units for 2021 (+11% from our previous estimate of 560K units). This follows the government decision to extend the 100% and 50% Sales and Services Tax (SST) exemption on CKD locally assembled and CBU fully imported car models respectively for another six months from 1 January 2021 until 30 June 2021 with the aim of revitalizing the local auto sector. We understand that this will be a continuation of the Penjana Economic Recovery Plan (ERP), where the stimulus lasted from 15 June 2020 until 31 December 2020.

• We deem the government’s initial strategy of spurring passenger vehicle sales in the Penjana ERP a major success after a weak showing in 1HCY20 – brought about by the Covid-19 pandemic and the movement control order (MCO). We highlight that the auto sector registered a total TIV of 324.7K units from June to November 2020, which was an impressive growth of 10% YoY (vs. 295.6K units in June–November 2019) in the presence of an economic downturn and a global pandemic. We also note that the June–November 2020 period made up 71% of 11M2020 total TIV.

• This announcement came in as a positive surprise given that the government had initially rejected the Malaysian Automotive Association’s (MAA) request for an extension of the SST exemption. Hence, the 100% SST exemption for CKD passenger vehicles and 50% for imported CBU fully imported car models will remain until 30 June 2021. From our checks, passenger vehicle prices will continue to be 1–6% lower across the board (depending on car model), which we believe will be benefitting to all auto players in our coverage in sustaining strong profitability in the next two quarters ending 1HCY21. In addition, we believe that the current low interest rate environment will prevail for the entire 2021 – which will be supportive of vehicle purchases throughout the year.

• While the SST exemption will continue to benefit all passenger vehicle brands across the board, we strongly believe that the local auto sector will still be backboned by both national automakers as both Proton and Perodua’s fleet of vehicles are priced more attractively – with superior value propositions compared to the midtier non-national brands such as Toyota, Nissan and Honda. As at 11M2020, the combined total market share of both Proton and Perodua stood at 64% of total TIV. We expect a similar trend to continue in 1H2021 – with the sustained strong sales momentum of the Proton X50 along with its PIES models, and the debut of the A-segment Perodua D55L SUV.

• As the extended measures to omit the SST for the next 6 months will be positive on the earnings of companies in the auto sector, we are revising our earnings projection and fair values for all the auto companies under our coverage, as follows:

1. MBM Resources: We maintain our BUY recommendation with a higher fair value of RM4.51/share (from RM4.32/share previously), pegged to an FY21F PE of 9x. We increase our FY21F net profit forecast by 4% to reflect higher Perodua sales volume for the year. MBM Resources remain our sector’s top pick.

2. DRB-Hicom: We maintain BUY with a higher SOP-derived FV of RM2.55 (from RM2.49/share previously). We increase our FY21F net profit forecast by 3% to reflect higher Proton and Honda sales volume for the year.

3. Sime Darby: We maintain BUY with an unchanged SOP-derived FV of RM2.87/share as our valuation is based on FY22F. We increase our FY21F net profit forecast by 1% to reflect higher BMW sales volume in the Malaysia market. Note that the SST exemption will fully impact Sime Darby only in FY21F as the group’s financial year-end is in June.

4. Bermaz Auto: We maintain BUY with a higher FV of RM1.74/share (from RM1.70/share previously), pegged to an FY22F PE of 13x. We increase our FY21–22F net profit forecasts by 3–2% to reflect higher Mazda sales volume for the group’s domestic market. Note that there will be sustained profit margin squeeze if the group chooses to continue giving out the extended 6-year warranty and free maintenance promotions and hence we are slightly more conservative in our upward profit forecasts revision for BAuto.

5. UMW Holdings: We are upgrading UMW to BUY from HOLD with a higher SOP-derived FV of RM3.66/share (from RM3.04/share previously). We increase our FY21F net profit forecast by 9% to reflect higher Toyota sales volume and higher associate earnings from 38%-owned Perodua.

6. Pecca Group: We maintain HOLD on Pecca with a higher FV of RM1.58/share (from RM1.34/share previously), based on an FY22F PE of 13x (from FY21F PE of 12x). We increase our FY21F net profit forecasts by 9% to reflect higher OEM sales volume in the domestic market. No changes to our FY22F estimates.

7. Tan Chong Motor: We have an UNDERWEIGHT recommendation on Tan Chong Motor with an unchanged FV of RM0.67/share. We peg Tan Chong to a P/B of 0.15x, which is at a 50% discount to TCM’s 3 year-average historical P/B of 0.3x to reflect the downcycle of the group’s business operations – having lost both its CKD and CBU agreements with its principal Nissan Japan on 19 September 2020 and 30 September 2020 respectively.

• We turn positive on UMW Holdings on the following reasons: (1) the timing of new CKD launches of both Toyota Vios and Yaris in 1QCY21, which will augur Toyota’s sales volume in 1HCY21; (2) the debut of the A-segment Perodua D55L SUV and we expect this new model to lift its 38%-owned Perodua’s earnings to greater heights (similar to how Aruz helped Perodua to register record high earnings in 2019); and (3) the SST exemption which will reduce Toyota car prices from 1.3-5.8% and Perodua car prices from 3.0-6.0%.

• UMW’s automotive segment contributes to >75% of the entire group’s top line. Just like what we have seen in the group’s recent 3QFY20 performance (a core net profit of RM80.0mil), we are expecting profits to sustain at said level during the extended SST exemption period. We note that the group has a sukuk repayment obligation of RM34.9mil net of tax in 2Q and 4Q annually, which we have incorporated in our FY21F earnings forecast.

December 2020 TIV snapshot

• From various news reports, we understand that Perodua registered a total sales volume of 220.2K units for the full year of 2020. We highlight a few key points from this statement: (1) We estimate Perodua’s December 2020 sales to be at 25.2K units; (2) Perodua has exceeded its 2020 full-year sales volume target of 210.0K units by about 5%; (3) Perodua’s sales volume was down 8% YoY (from 240.3K units in 2019), no thanks to the production and distribution halt in March–May 2020 earlier this year due to the MCO.

• Perodua has also hit the one million energy-efficient vehicle (EEV) milestone in November 2020, which further augurs its position as Malaysia’s largest EEV manufacturer. We note that all of Perodua’s fleet of vehicles (except the 7-seater Alza) are EEV complaint, making them beneficiaries of EEV-customized incentives.

• All-in, we maintain OVERWEIGHT on the auto sector with a TIV projection of 500K for 2020 and 600K for 2021 respectively. This is premised on: (1) the economic recovery post-pandemic with an in-house projected GDP growth of 6.5-7.0% in 2021; (2) the surprise extension of the SST exemption - which we believe will continue to encourage consumer spending on passenger vehicles, auguring the auto sector in 1HCY21. We expect the strong sales volume to sustain till June 2021 across the board for all major automakers and we maintain positive on national cars Proton and Perodua. Our top pick for the sector is MBM Resources (FV: RM4.51).

Source: AmInvest Research - 4 Jan 2021