Investment Highlights

• No change in our OVERWEIGHT recommendation and 2022 TIV forecast of 555,000 units, implying a 9% YoY growth. January 2022 industry volume rebounded from last year’s low base, due to the absence of movement control orders as the sector’s supply chain resumed productions. We believe that the worst is over, and we expect industry sales to rebound in 2022 as the supply chain normalizes and consumers’ confidence gradually recovers underpinned by the pick-up in broad-based economic activities. Our top picks are Bermaz Auto (BAuto) (fair value RM2.00) and UMW Holdings (FV RM3.90).

• Car sales to rebound in upcoming months. The Malaysian Automotive Association (MAA) reported 40,581 units (-48% MoM, +22% YoY) of total industry volume (TIV) in January. All key brands reported sequentially lower sales volume, and this is mainly due to the low inventory level after the seasonally stronger December 2021 sales and the Selangor floods that further disrupted the already strained sector’s supply chain. Note that January 2021 TIV was negatively affected by the movement control order implementation and a spike in Covid-19 cases which dampened showroom footfall. However, we expect TIV to rebound in February as car distributors/manufacturers are ramping up their production to meet demand.

• Sales breakdown by brands. Proton and Honda sales volume declined the most during the month at 4,316 units (-68% MoM, -28% YoY) and 3,862 units (-52% MoM, +165% YoY), respectively. The flood in the Shah Alam area has affected Proton’s vendors and disrupted the production of the Proton Saga and Exora. Only 76 units of the Saga and 54 units of the Exora were sold during the month. Nevertheless, the carmaker has resumed production for all models in January hence we should see improved sales in February. Mazda’s sales volume was 847 units, lower than its monthly average of 1,000–1,200 units’ range. However, management of BAuto clarified that the company’s wholesale volume was above 1,000 units in January and the difference with the MAA reported numbers was due to time lag of the vehicles being registered. Also note that, starting January 2022, Volvo will only be submitting its sales data on a quarterly basis. Therefore, the January reported TIV has yet to include the sales numbers of the Volvo, BMW and MINI brands.

• Sales of commercial vehicles were reported at 6,913 units (-9% MoM, +74% YoY), relatively higher compared to last year’s monthly average of 4,700 units as the economy reopens.

• New model launches. Notable models in the pipeline for the next 12 months are the all-new Perodua Alza (potentially will be launched in April/May), the next generation HR-V, the Kia Sportage, Honda Odyssey, and potentially a new Geelybased model by Proton. BAuto’s plan to introduce the locally assembled variant of the Mazda CX-30 remains intact with its potential introduction as early as end-2022.

• Maintain OVERWEIGHT recommendation on the sector. The auto sector’s earnings are expected to rebound in 2022 as demand for new cars would be bolstered by the SST exemption, improving consumer confidence as the economy gradually recovers, and the accommodative interest rate environment. No change in our 2022 TIV forecast of 555,000 units, which implies a 9% YoY growth. Our top picks are BAuto (FV RM2.00) and UMW Holdings (FV RM3.90).

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

Source: AmInvest Research - 23 Feb 2022