Investment Highlights

• We maintain our OVERWEIGHT stance on the auto sector with an unchanged TIV projection of 575K units for 2021. The government has extended the 100% and 50% sales and service tax (SST) exemption on CKD (locally assembled) and CBU (fully imported) car models respectively for another six months from 1 July 2021 till 31 December 2021 with the aim of sustaining the robust operations of the local auto sector. The SST exemption had earlier commenced from 15 June 2020 until 30 June 2021. We are positive on the extension of the SST exemption. However, a semiconductor chip shortage and the enforcement of MCO 3.0 will temporary impact production and sales of vehicles.

• The government’s strategy of spurring vehicle sales in the implementation of the Penjana ERP was successful after a weak showing in 1HCY20 due to the Covid-19 pandemic and the movement control orders (MCO) imposed last year. There has been a significant improvement in TIV following the stimulus package as evidenced by the auto sector’s increase in total TIV of 354.6K units from July 2020 to February 2021, an impressive growth of 10% YoY (vs. 392.0K units in July 2019–February 2020).

• The extension of SST exemption was not a surprise to us given that most of the industry players and the Malaysian Automotive Association (MAA) have requested and submitted proposals for the extension for another 3 to 6 months. Hence, the 100% SST exemption for CKD passenger vehicles and 50% for fully imported car models will remain until 31 December 2021. With that, passenger vehicle prices will continue to be 1–6% lower across the board (depending on car models). In addition, the current low interest rate environment is envisaged to be supportive of vehicle sales 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 which are priced more attractively, with superior value propositions compared to the mid-tier non-national brands such as Toyota, Nissan and Honda. As at 4M2021, the combined total market share of both Proton and Perodua stood at 64% of total TIV. We expect a similar trend to continue in 2H2021 with the sustained strong sales momentum of the Proton X50 along with its PIES models, and the A-segment Perodua D55L SUV. YTD, 4M21 TIV of 199.7K stood at 35% of our full-year TIV projection of 575K.

• From our findings around with our channel checks on the semiconductor chip supply shortage issue, we believe Honda and Perodua have been most impacted so far. Currently, we do not have any indication as to how long this global semiconductor chip shortage will last.

• From checking with the industry players on the MCO 3.0 from 1 till 14 June 2021, we gather that: 1) manufacturing and assembly activities are only allowed 10% workforce; 2) showrooms are NOT allowed to operate; and 3) JPJ will be closed, rendering vehicle registration efforts futile. The closure of JPJ would also imply zero sales throughout the period (similar to April 2020). Depending on the progress of new Covid-19 cases nationwide and risk assessment by the Ministry of Health, the latest MCO will temporary impact sales of vehicles.

• We make no changes to our FY21F estimates for now and will continue to observe the ongoing developments within the sector. We have BUYs for Sime Darby, MBM Resources, Bermaz Auto, UMW Holdings and DRB Hicom. We have UNDERWEIGHT recommendation on Tan Chong Motor as it is fundamentally challenged, and Pecca Group due to excessive valuations.

Source: AmInvest Research - 1 Jun 2021