Investment Highlights

• The Malaysian Automotive Association’s (MAA) TIV sustained at 67,659 units (+0.1% MoM) in September, as automobile firms’ production continues to run at full capacity to clear off outstanding orders. MoM, deliveries of passenger vehicles contracted slightly (-1%) while commercial vehicles (+11%) reported sequentially stronger sales volume. This brings 9M2022 TIV to 516,798 units (+62% YoY), on track to meet our 2022F TIV of 655,000 units (MAA: 630,000 units). Almost all key brands reported slightly lower sales compared to the previous month. However, this was offset by lumpy recognition of Mercedes-Benz deliveries, which was reported on a quarterly basis. YoY, the September industry sales volume jumped 53% due to low base effect as the sector was affected by movement control orders last year.

• There was no significant change in the composition of market share YTD vs. 1HCY22. Perodua maintained its leadership with a YTD market share of 38%, followed by Proton at 19%. Toyota/Lexus remains the non-national leader having a 13.7% market share vs. Honda (11.6%), its closest competitor. Mazda’s market share remained flattish at 2.2%.

• Sector earnings are expected to remain resilient in 3QCY22, underpinned by robust sales volume. With the view that there will not be any significant change in automobile firms’ cost structure, we expect the stronger 3QCY22 TIV of 185,125 units (+8% QoQ, 1.7x YoY) (Exhibit 3) to translate into sequential improvement in the sector earnings. We do not rule out the possibility of margin expansions on the back of better operating leverage from higher production levels.
  For companies under our coverage, UMW Holdings (BUY, FV: RM4.60) and MBM Resources (BUY, FV: RM5.00) will benefit from the higher sales of Perodua (+5% QoQ) and Toyota/Lexus (+6% QoQ) cars. Automobile firms linked to Proton (+28% QoQ) and Honda (+7% QoQ) also stand to benefit from the stronger deliveries. However, bucking the broader industry trend, Nissan/Renault sales volume declined 20% QoQ and this would be reflected in Tan Chong Motor’s (UNDERWEIGHT, FV: RM0.65) potentially weaker 3QFY22 results.

• We make no changes to our 2023F TIV of 600,000 units which assumes industry sales would normalise back to prepandemic levels following the absence of the sales & service tax (SST) exemption, which expired on 30 June this year. However, we do not expect a sharp decline in sales as automobile firms are still registering a healthy daily order rate even after the end of the SST exemption period. Given the long waiting list and resilient booking rate, car deliveries are likely to spill over beyond March 2023 and this could cushion a fall in industry sales. Distributors/automakers’ decision to delay their new launches also bodes well as it would help provide an additional boost to sales next year.

• Key risks. An abrupt shift in consumer sentiment due to recessionary fears will be the key downside risk to our recommendation and earnings forecasts. The impact could be compounded by sustained widespread inflation and rising interest rates. The further weakening of RM against the US dollar also might affect UMW Holdings and Tan Chong Motor’s gross margin.

• We retain our OVERWEIGHT recommendation premised on a sturdy underlying demand for cars moving forward, supported by economic growth and the persistent need for private vehicles, being Malaysians’ primary mode of transportation. Our top picks are Bermaz Auto and MBM Resources given their high sales visibility and product updates, which have garnered encouraging customer receptions.

Source: AmInvest Research - 20 Oct 2022