Investment Highlights

• 3QCY22 results outperformed expectations. 2 out of 5 companies under our coverage reported above-expected results and 3 within. MBM Resources’ (MBMR) earnings outperformed, mainly attributed to higher-than-expected sales of Perodua. The national carmaker’s market share rose 4.8%-point QoQ to 42% during the quarter. The depreciation of THB/MYR and JPY/MYR also helped to partially offset the stronger US$/MYR impact on MBMR’s bottom line. Tan Chong Motor Holdings’ results beat expectations as improved sales from the gradual pick-up in economic activities turned the company around from a net loss a year ago that was dragged down by pandemic lockdowns. For the 3 other companies, namely Sime Darby, UMW Holdings and Bermaz Auto (BAUTO), the results were within ours and consensus expectations.

• Earnings dropped 29% QoQ. The sequential drop in 3Q2022 earnings was caused by the expiry of the sales and service tax (SST) exemption on 30 June 2022, where carmakers were rushing to deliver before the deadline. Recall that automakers’ fulfiment of orders were impacted by chips and component shortages due to the supply chain disruptions. The extension of deliveries to March next year will support their earnings going into 2023. Sales in 2023 will be underpinned by the flow-through of deliveries coupled with the continuous new model roll-outs. Therefore, we do not foresee a sharp decline in car sales post-SST exemption. Given the better performance in the automobile segment, we increased MBMR’s FY22F earnings by 5% and Tan Chong Motor Holdings’ by 2x, bringing our aggregate calendarised sector 2022F earnings slightly higher by 1%.

• Auto sales momentum to continue in 4QCY22. Year-end campaigns and stock clearance are poised to attract bargain-hunting buyers in the last quarter of the year. For instance, Bermaz Auto will absorb 50% of the SST for Mazda cars until the end of December and is reviewing the same strategy on a monthly basis for Kia and Peugeot cars. While margins are expected to be affected by incentive spending, we believe that this will be partially mitigated by a weakening US$/MYR (-8%) after peaking in the beginning of November 2022, which is a major boon for most automakers as this will drive down imported costs and alleviate margin pressures.

• Demand growth for automobiles set to carry into 2023. To date, demand for cars is still going strong, judging from robust bookings registered by some of the main marques (Perodua’s monthly bookings recovered near the pre-pandemic level). Apart from conventional car roll-outs, electrical vehicles (EVs) may also add a slight impetus to the industry. Toyota is committed on HEVs and BEVs launches in 2023 and beyond, whereas Perodua evaluates a hybrid model. As such, we expect 2023F revenue and earnings for the sector to remain on an uptrend.

• Raise 2022F TIV. We raise our 2022F total industry volume (TIV) to 665,000 units (from 655,000 units previously) vs. 630,000 units by the Malaysian Automotive Association, after taking into account higher sales volume for Perodua. Subsequently, we also change our 2023F TIV higher to 615,000 units (+15,000 units).

• Maintain OVERWEIGHT call given the sustainable demand recovery, which is in line with Bank Negara’s GDP growth forecast of 4% - 5% in 2023. Our top picks are MBMR (FV: RM5.10), BAUTO (FV: RM2.25) and UMW (FV: RM4.65).

• Key risks: i) a stronger than expected USD will erode margins due to the inflated imported costs and ii) persistent inflation pressures will impact the purchasing power of consumers and discretionary spending.

Source: AmInvest Research - 9 Dec 2022