Investment Highlights

• 1Q2023 results were largely within expectations. 2 out of 5 companies under our coverage reported results were within expectations, 1 was below while 2 were above. UWM Holdings (UWMH) and Bermaz Auto (BAuto) outperformed as the motor segment recorded sales, which were higher than expected. UMWH rode on Perodua’s good performance in 1Q2023. UMW’s share of profits in 38%-owned Perodua increased in 1Q2023 as the latter enjoyed growing sales volumes in spite of the lapse of sales tax-free window in June 2022. According to the Malaysian Automotive Association (MAA), total industry volume (TIV) was 192,474 units (-5% QoQ) in 1Q2023.

• BAuto’s results exceeded expectations as it benefited from commendable car sales, particularly for its mainstay Mazda CX-5, as well as CKD CX-30 which has also gained traction after launching in March 2023. Meanwhile, Sime Darby’s (Sime) earnings were squeezed by lower margins in China. MBM Resources (MBMR) and Tan Chong Motor Holdings (TCMH) were within our and consensus’ expectations.

• Earnings improved 9% QoQ. The sequential improvement of 9% in 1Q2023 earnings was supported by higher car sales volume as carmakers rushed to fulfill delivery for registration by the March 2023 deadline. Due to the good performances in the automobile segment, we raised UMWH’S FY23E earnings by 7%, BAuto’s by 4% but cut Sime’s earnings by 5%, bringing our aggregate calendarised sector 2023F earnings marginally lower by 1%.

• Sector earnings dragged down by Sime. Sime missed our expectations due to lower margins in China. China is the largest revenue contributor in the motor segment. Competition in China has become more intense after Tesla slashed its car prices and peers followed suit to remain competitive.

• No surprise from TCMH. TCMH was still in the red in 1Q2023. While we do not have visibility on its new launches pipeline, a turnaround is not expected to take place anytime soon. This is because the Vietnam operation has lost the distributorship for both Nissan and MG brands, resulting in a consistently low utilization rate of its Danang plant.

• Post-SST new bookings are still strong. We gather that Perodua could be sitting on a backlog of 192,000 units as of May while UMW Toyota has a backlog of 50,000 units. March’s outstanding order book was almost the same for both carmakers, which indicates that new bookings were still strong even after the sales tax-free window has closed. Notably, Perodua garnered close to 40,000 units in the month of April, comprising mainly Bezza, Myvi, Axia and Alza. We think that industry sales momentum would sustain going into 2H2023 as we expect more new models to be rolled out in 2023 compared to 2022, especially on the affordable price ranged models which will be well received by the mass market.

• Apart from new bookings, sector earnings are also expected to be supported by sizeable backlog orders - 6 – 7 months for UMW Toyota and Perodua and 5 – 6 months for BAuto and Proton. As for profit margins, we do not expect a compression in 2H2023 as carmakers have increased their prices in the beginning of the year to counter inflationary and higher raw material costs.

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

• Affirm OVERWEIGHT due to the automakers’ earnings visibility and new bookings. Our top picks are MBMR (FV: RM5.22), BAUTO (FV: RM2.70) and UMW (FV: RM4.75).

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

Source: AmInvest Research - 9 Jun 2023