Investment Highlights

• Maintain OVERWEIGHT on the sector. Despite the test-rigging revelation by Dahaitsu, we make no changes to our rating as both Perodua and UMW Toyota have confirmed and reassured that the Axia and Vios models are safe for driving and no recall notices will be issued. While this news serves as a testament to Perodua’s ability on sustaining its market leadership, we are unfazed, due to Axia being an entry-level model without viable replacements in the market. Also, its fundamentals are fueled by strong sales of other models, including but not limited to Myvi, Bezza and Alza. In addition, our sector call is supported by sustained orders on the back of continuous new launches despite the expiry of sales & service tax (SST) exemption incentives since June last year.
  To put into perspective, March 2023 sales reached a record-high as carmakers rushed to fulfill their deliveries for the taxexempted car registration. Furthermore, Perodua’s sales also achieved an all-new high in the same month. As such, we do not foresee an immediate need for any premature revision but will monitor the situation closely for any fluidity that can impact on our current call on the sector.

• Crash safety tests altered by Daihatsu. Daihatsu Co admitted on 28 April 2023 that there was a procedural irregularity on 88,000 cars, including Perodua Axia, Toyota-branded Yaris Ativ and Agya models, alongside another vehicle still under development. According to Daihatsu, the affected cars have components known as “notch” added to door trims during crash tests to reduce the risk that the panel could break with a sharp edge and hurt passengers when the side airbag is deployed. This alteration for testing, however, is not part of the production vehicle.

• Involved Axia and Vios. Of the 88,000 units, it is reported that about 11,800 Perodua Axia and 76,000 Toyota Yaris Ativ might be affected by the incident. Nevertheless, Perodua issued a statement on 30 April 2023 and clarified that the technical safety of its Axia model remains intact. Meanwhile, UMW Toyota also cleared the air on 1 May 2023 that its Toyota Yaris Ativ, which is sold in Malaysia as Vios, complies with the safety standards and quality. Hence, there is no need for the models to be recalled and deliveries to customers will continue as usual.

• No impact. Vios accounts for 25% of UMWH’s FY22 car sales and Axia about 25% of Perodua’s. However, we expect no impact to MBMR and UMWH given that 1) fundamentals remain solid since no vehicles will be recalled nor deliveries disrupted; 2) the UN-R95 certification given separately to Axia and Vios, which governs a vehicle’s safety rating for lateral collisions and forms part of the Asean New Car Assessment Programme (NCAP), remains valid.

• Maintain a 3-star ESG rating. We keep a 3-star ESG rating on the sector which continues to generate carbon dioxide (Co2) emissions. In view of that, the continuous transition towards carbon-neutral vehicles will be steering the industry moving forward, with carmakers lining up to introduce more electrical vehicles (EV). The government remains committed to reduce greenhouse emissions in the transportation sector with plans to develop the necessary charging infrastructure and tax incentives for EV purchases in its 2021 – 2030 Low Carbon Mobility Footprint roadmap.

• Key risks and potential de-rating. Key risks to our rating include slower-than-expected improvement in supply chains, a weaker MYR and sluggish growth in the economy. Additional potential de-rating factors are lower-than-expected car sales and fewer new launches from automakers.

• Top picks for the sector. We like MBMR (BUY, FV: RM5.22) and UMWH (BUY, FV: RM4.70) for their strong growth trajectory supported by resilient Perodua sales. Meanwhile, MBMR has relatively less exposure to currency risk due to its dealership business model. BAuto (BUY, FV: RM2.63) is also on our radar with an attractive FY23F dividend yield of 6%, leveraging on its continuous new model rollouts and consumer-friendly incentives to entice buyers.

Source: AmInvest Research - 2 May 2023