Investment Highlights

• 4QCY22 results underperformed expectations. 3 out of 5 companies under our coverage reported below-expected results, 1 within and 1 above. MBM Resources’ (MBMR) earnings outperformed, mainly attributed to higher sales from its auto trading segment. The Malaysian Automotive Association’s (MAA) data showed that Perodua sold 85,665 units (+24% QoQ) during the quarter.
  Results of UMW Holdings (UMWH) were dragged down by lower share of profit from its associates, Perodua, on higher operating cost whereas Sime Darby’s (SIME) earnings were squeezed by lower margin from its China auto segment due to stiff competition. Meanwhile, Tan Chong Motor Holdings (TCMH) was back into the red again, impacted by supply chain issues from its principal as well as forex losses. For Bermaz Auto (BAUTO), the result was within our and consensus’ expectations.

• Earnings improved 9% QoQ. The sequential improvement of 9% in 4Q2022 earnings was supported by large order backlogs alongside continuous new launches by carmakers. However, given the mixed performance in the automobile segment, we cut SIME’s FY23F earnings by 5% and reversed TCMH to a net loss of RM25mil while increasing MBMR’s by 9%, bringing our aggregate calendarised sector 2023F earnings lower by 4%.

• Sales momentum stays strong. Carmakers have secured a large order book with UMW Toyota and Perodua recording more than 270,000 combined bookings that could potentially last for 5-6 months whilst BAUTO and Proton have more than 5 months of sales visibility. With the ongoing new model launches, we expect order book accretion to maintain momentum moving forward. Notwithstanding the lower bottomline in 2022, which was mainly attributable to one-off operating costs, we reckon Perodua is all set to continue outperforming in 2023, bolstered by the recently launched all-new Axia’s robust bookings of more than 22,000 units since launching on 31 January 2023.
  While price of commodities has increased lately, we believe Perodua would have accounted for higher costs with upward price adjustments in its new model and upcoming facelifts. Also, Toyota has tweaked its prices slightly higher by 3%-5% in the beginning of the year. Hence, margin compression is not expected for MBMR and UMWH for the next quarter ahead.

• Electrification push. Tesla has recently been approved to import battery electric vehicles (BEVs) to Malaysia, which will also see the company setting up a head office, experience & service centers to establish a network of superchargers. The supercharger network might come in handy with the government’s pursuit of a total of 10,000 charging points nationwide by 2025 from the current 900 units, in our view.
  The import approval comes as a part of Ministry of International Trade and Industry’s (MITI) Global BEV Leaders initiative, which allows carmakers to import CBU BEVs via approved permit. There are some qualifying requirements including a significant 5-year sales volume growth together with ownership of a plant of at least 1GWh capacity to supply EV batteries in accordance with international requirements.
  In view of Indonesia and Thailand’s aggressiveness in pushing for electrification play, we deem this initiative as a stepped up effort from the government to keep up with the competition. Furthermore, the extension of duty exemption for EVs shows that the government remains committed to the race. On a side note, we are likely to see BEV from UMW Toyota’s upcoming new models while Perodua is mulling over a hybrid model. As such, we remain upbeat on 2023F revenue and earnings.

• Maintain 2023F TIV. We maintain our 2023F total industry volume (TIV) of 650,000 units, in line with MAA’s forecast with a target sales volume of 300,000 units for Perodua.

• Maintain OVERWEIGHT call given automakers’ solid earnings visibility, underpinned by stable domestic demand from household spending as the labour market continues to improve with unemployment rate declining to 3.6% in 4QCY22 (- 0.1%-point QoQ). Our top picks are MBMR (FV: RM5.22), BAUTO (FV: RM2.51) and UMW (FV: RM4.70).

• Key risks: i) a stronger than expected USD will erode margins due to the increase in import costs, and ii) persistent inflation impact the purchasing power of consumers and spending on big ticket items.

Source: AmInvest Research - 8 Mar 2023