Investment Highlights

• We remain OVERWEIGHT on the auto sector with an unchanged TIV projection of 575K units (+9% YoY growth) for 2021. We expect TIV growth in 2H21 to be supported by a sustained strong performance of national marques i.e. Proton and Perodua due to their more attractive pricings and value propositions for their products in the domestic auto market.

• Below Are Our Expectations for the Sector in 2H2021:

1. SST exemption stimulus, coupled with the gradual reopening of the economy, to be supportive of TIV. We expect the auto sector to resume operations (on the assembly, manufacturing and reopening of showrooms) in either July or August 2021 as the nation gradually moves from phase 1 of MCO 3.0. Based on our understanding of the National Recovery Plan, the auto sector should be able to operate business as usual in phase 2. Phase 2 entails a situation where Covid-19 cases are below 4,000 on a daily basis; and 10% of the population have completed two doses of the Covid-19 vaccine, thus allowing certain non-essential economic activities to resume.
   
   We note that the government is also ramping up vaccination efforts to achieve herd immunity (an inoculation of 80% of the Malaysian population) by December 2021. Efforts are undertaken to increase the number of vaccine doses administered daily to 200.0K in July and 300.0K in August.
   
   With the acceleration of the vaccination drive and gradual easing of the MCO by phases, we anticipate consumer spending (on big-ticket items such as passenger vehicles) to remain robust in 2H2021 with sentiment gradually improving. The SST exemption –100% and 50% sales tax (SST) exemption on locally assembled (CKD) and fully imported (CBU) car models respectively – has been extended till 31 December 2021, and we believe that this would continue to spur vehicle sales till the end of the year.
    
2. We project TIV of 50–60K units per month post-lockdown, with the bulk of market share to be tilted in favour of national car brands. We anticipate TIV sales volume in 4Q21 to be stronger with an average 50–60K units per month. We believe that the worst is over, and that there will be gradual easing of restrictions globally, alongside global vaccination programmes, which will improve businesses’ cash flows and reduce the disruptions to supply chains. Production of vehicles in the domestic auto market will also be normalized with the gradual easing in the shortage of chips seen recently – especially with Perodua’s Myvi. From our checks, we gather that Perodua is trying to find substitutes to its supply chain via sourcing of different suppliers.
   
   The auto sector will still be led by both national automakers as Proton and Perodua’s fleet of vehicles are priced attractively with superior value propositions compared to the mid-tier non-national brands such as Toyota, Nissan and Honda (i.e. X70 vs. X-Trail/CR-V/C-HR; X50 vs. HR-V; Aruz vs. BR-V). The Perodua Ativa, Aruz, Proton X70 and X50 SUVs are not only more attractively priced compared to its peers, these models also provide more interior technological features for a superior driving experience. The X50 is the first car in the domestic market with Level 2 automation.
   
   We maintain BUYs on DRB-Hicom (fair value RM2.38/share) and MBM Resources (FV RM4.51/share) as they are the direct proxies to Proton and Perodua’s dominance in the auto sector.
    
3. Expecting stronger sales volumes in 4Q21. We are expecting a strong finish to the year as auto players usually offer additional promotional discounts or cash rebates for year-end clearance and the festive season in 4Q21. Also, consumers would want to lock in their purchases to enjoy the reduction in car prices (ranging from 1% to 6%, depending on car models) from the SST exemption which will end by 31 December 2021. Last year, December 2020 TIV shot through the roof with a total sales volume of 68.8K units (60-month high). We are expecting a similar trend before the end of SST exemption this year.
    
4. Low financing rates to continue to be supportive of purchase of vehicles. According to our in-house projection, the OPR is expected be maintained at 1.75% for 2021. The low interest rates will remain conducive for consumers to purchase new passenger cars and obtain vehicle financing.
    
5. Stronger ringgit against the USD to be positive for auto players’ profit margins. The further strengthening of the ringgit against the USD will generally be positive for auto players in our coverage. Key companies that are likely to show positive surprises in profits benefitting from a stronger ringgit include Tan Chong Motor and UMW Holdings. A substantial portion of their COGS, circa 60% and 40% respectively, are denominated in USD. Ceteris paribus, this will lower their operating costs, consequently expanding their profit margins.

• 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 prolong the lockdown; (2) heightened global trade tensions which could lead to a steep weakening of the MYR against the USD, compressing companies’ margins and requiring a hike in car prices to maintain profitability levels; and (3) a tightening by banks on vehicle financing which will directly constrain demand on cars.

• Our top pick is MBM Resources (FV RM4.51/share) and DRB-Hicom (FV RM2.38). In our view, MBM Resources is currently undervalued, trading at 6.5x FY21F EPS, compared to the sector average of 14.7x. On the other hand, DRBHicom is expected to continue to benefit from Proton’s sustained strong sales momentum from its X50, X70 SUVs and its mainstay PIES models. We continue to see bright spots in both national automakers as both Proton and Perodua’s fleet of vehicles are more attractively priced with superior value propositions compared to the other brands such as Nissan and Honda.

• We also have BUYs on Bermaz Auto (FV RM1.80/share), Sime Darby (FV RM2.87/share) and UMW Holdings (FV RM4.07/share). On the flipside, we are UNDERWEIGHT on Tan Chong Motor as it is fundamentally challenged after losing both its CBU and CKD rights in Vietnam, and Pecca Group due to excessive valuations.

Source: AmInvest Research - 19 Jul 2021