Investment Highlights

• We maintain our OVERWEIGHT recommendation on the sector with a 2022 TIV forecast of 555,000 units, implying a 12% YoY growth. We expect TIV to continue to improve as the supply chain normalizes and consumers take advantage of the sales tax (SST) exemption. With a high vaccination rate and the number of Covid-19 cases remain low, consumer confidence is expected to gradually improve.

• Cyclicals to benefit from the economic reopening. As businesses head towards normalization, the reopening of the economy could benefit cyclical industries which had lost their appeal since the pandemic hit. Some of the sector’s heavyweights such as Sime Darby, UMW Holdings and Bermaz Auto (BAuto) are trading at inexpensive valuations of 12.4x, 11.7x, and 11.5x PER CY22 EPS respectively despite the improved outlook (vs. historical average of 14.5x, 15x, and 15x respectively). The auto sector’s earnings are expected to rebound in 2022 as demand for new cars would be bolstered by the SST exemption – 100% and 50% SST exemption on locally-assembled (CKD) and fully imported (CBU) car models respectively – and improving consumer confidence as the economy gradually recovers. Our base case assumption is there will be no lockdowns moving forward. We deem the national vaccination programme a success with 97.5% of adults in the country have been vaccinated as of end-December, followed by the declining trend of Covid-19 cases.

• Temporary weakness expected post-SST exemption is not a cause for concern. The impact will be partially offset by the improving consumer sentiment, deliveries of newly launched models and potentially the decision by some distributors to absorb the SST cost beyond 30 June 2022 to prevent a hard landing of sales. Also, the gradual easing of restrictions will improve businesses’ cash flows and reduce the disruptions to supply chains while consumer spending on big-ticket items such as passenger vehicles remains robust in tandem with the pickup in economic activities. Historically, there is a positive correlation between the country’s GDP growth and TIV growth, especially post-economic crisis (Exhibit 2).

• Catching up on new model launches. We are expecting a slew of new models to be launched in 2022 (Exhibit 3) as distributors held back their model launches due to lockdowns in 2021. Among notable new models that we expect to see in 2022 are the all-new Honda Civic, Peugeot 2008, Kia Sportage and the long-awaited all-new Perodua Alza. The TIV also will be supported by recently launched volume models such as the Perodua Myvi facelift and Honda City Hatchback. Among the companies under our coverage, we believe BAuto has the most robust pipeline of new launches with 20 models, including facelifts, set to be introduced in 2022. This would contribute to a more consistent and predictable sales flow for the company.

• Playing the long game in EVs. The duties exemption for electric vehicles (EVs) announced by the government during Budget 2022 is a step in the right direction to encourage EV adoption. However, we believe that a lot more needs to be done before we could see a more meaningful impact of EVs in Malaysia’s automotive landscape. Besides a lack of charging infrastructure, the high maintenance cost and low resale value associated with EVs are among the prohibitive factors for a wider adoption among Malaysian consumers. Nevertheless, auto firms are planning to begin introducing EV models to take advantage of the incentives but the impact on their bottom lines is likely to be immaterial at this juncture.

• Our top picks are BAuto (fair value RM2.00/share) and UMW Holdings (FV RM4.07/share). BAuto is currently trading at an attractive 11.6x PER CY22F EPS (vs. its historical average of 15x PER). Its new ventures of Peugeot and Kia distributorships provide the company with new earnings growth avenues. Meanwhile, all three UMW’s business divisions namely automotive, industrial and manufacturing & engineering are set to benefit from the reopening of the economy. We also have BUY calls on Sime Darby (FV RM2.87) and DRB-Hicom (FV RM2.38).

• 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% at least in 1H22 with the potential first rate hike of 25bps in 2H22, more likely in 4Q22. The low interest rates will remain conducive for consumers to obtain vehicle financing for the purchase of new passenger cars.

• Expect bumper earnings in 4Q21. TIV is expected to be seasonally stronger in 4Q21 as auto players offer additional promotional discounts or cash rebates for year-end clearance and this would translate into strong earnings for auto firms in 4Q21. We are maintaining our 2021 TIV forecast of 495,000 units.

• Key risks: The unfavourable forex trend of a weakening MYR against the USD and JPY poses risk of margin compression for the auto companies, particularly UMW Holdings (USD), Tan Chong (USD) and BAuto (JPY). A sorse-than-expected chip shortage crisis due to supply chain disruption is another key risk that could derail the sector’s earnings.

Source: AmInvest Research - 27 Dec 2021