Investment Highlights

• We maintain OVERWEIGHT recommendation. Automobile stocks have outperformed the FBMKLCI by 5.5% points YTD (Exhibit 2). Their share prices were held up by robust industry sales volume mainly driven by the SST exemption and improving consumer sentiments following the reopening of the broader economic activities, partially offsetting inflationary fears. The extension of the SST-exemption registration period also bodes well for the sector as it helps the industry to build order banks and provide sales visibility for the upcoming months.

• Order book to stay robust for the remainder of 2022. Based on backlogged orders of key marques, we estimate the industry waiting list standing at an average of 7–8 months (Exhibit 3), significantly longer than the pre-pandemic average of 2–3 months. Our assumption is based on production capacity reverting to the pre-pandemic level as the chip shortage issue is expected to ease in 2H2022. Notably, among the key marques, Perodua has the strongest order book, estimated at 8–9 months’ worth of sales.

• Supply disruption situation is improving. Global automakers – including Volvo, Hyundai Motor Co, Kia Corporation, and Volkswagen – are seeing signs of the chip shortage crisis easing and expecting an improvement in 2HCY22. Closer to home, Perodua also has managed to resolve the chip shortage issue after sourcing it from alternative suppliers while Proton is seeing a gradual improvement in its fast-moving stocks, which previously plagued its production and after-sales services. This would help to smoothen deliveries as auto firms rush to fulfill backlogged orders before the end of the SST-exemption registration period.

• Fears of rising cost of living due to food inflation and interest rate hike, that could lead to consumers cutting discretionary spending is not unfounded. However, instead of stopping car purchases, we believe consumers are more likely to down trade, opting for brands that offer better value-for-money models and stronger resale value. This is due to a lack of feasible alternatives; Malaysians are still heavily dependent on private vehicles as the primary mode of transportation. On top of that, the robust new model launch pipeline would entice consumers to spend. Separately, the easing in raw materials prices recently (Exhibits 10–11) helps automakers to avoid increasing the prices of their products, which could have exerted further pressure on prospective buyers.

• No change in our 2022 total industry volume (TIV) forecast of 610,000 units (Malaysian Automotive Association: 630,000 units), implying a 20% YoY growth.

• Our top picks are Bermaz Auto (fair value RM2.25) and MBM Resources (FV RM5.00). The stocks are currently trading at an attractive level of 10.3x and 5.4x FY23 EPS respectively, lower than their historical average (Exhibits 8–9).

• Key risks. Rising input costs and unfavourable forex trend pose a risk of margin compression for auto companies. Worsethan-expected inflation leading to consumers cutting on discretionary spending together with labour and inventory shortages affecting manufacturers’ productivity rate are other downside risks to our calls and fair values.

Source: AmInvest Research - 26 Jul 2022