WHAT’S NEW

• May 18: Weak sales in anticipation of zero-rated GST effective 1 Jun 18. As expected, automobile sales volume in May 18 declined 8.7% mom and 15% yoy to 42,983 units. The subdued mom sales volume was due to consumers holding back on their purchases in anticipation of the implementation of zero-rated GST effective 1 Jun 18. The Malaysian Automotive Association (MAA) expects sales volume to surge in Jun 18 on the back of the implementation of zero-rated GST effective 1 Jun 18. 5M18 sales volume dipped 3.8% yoy to 225,212 units.

COMMENTS

• Sales volume to spike from 1 June until 31 Aug 18 and tank thereafter; Bermaz Auto is our top pick for the sector. Effective 1 Jun 18, all carmakers revised their product prices about 5.5% lower due to the implementation of the zero-rated GST. However, we note that the government will reintroduce the SST (timeline and quantum are not known yet) and if the previous SST of 10% is introduced, car prices will be slightly higher than GST-inclusive prices, and sales volumes will fall due to frontloading of car purchases during zero-rated GST period. We maintain our 2018 TIV growth forecast of 2-4% yoy, at 588,000-600,000 units. MAA expects 2018 TIV to grow 2.3% yoy to 590,000 units.
• Perodua remains the market leader, and Honda continues to be leader among non-national marques. We note Perodua gained considerable market share at 43% ytd (2017: 36%) at the expense of Proton. Meanwhile, although Honda’s ytd market share has contracted slightly to 18% (2017: 19%), the brand remains the leader among the non-national marques, far surpassing Proton.
• UMW Holdings (UMWH MK/HOLD/Target: RM6.20): Automobile segment making a strong comeback. UMW reported a strong 1Q18 on the back of a strong comeback from its automobile segment where PBT rose 44.6% yoy on a stronger ringgit. Its plans to increase its stake in Perodua via the acquisitions of a 10% stake in Perodua from PNB Equity Resources Corporation Sdn Bhd (PNB), and a 50.1% stake in MBM Resources from Med-Bumikar Mara Sdn Bhd (49.5%) and Central Shore Sdn Bhd (0.57%), had hit a bump recently. Media reports indicated that the major impediment is Daihatsu’s objections to having UMW as the single largest shareholder of Perodua. The Edge Weekly had reported that Daihatsu is adamant on this and even threatened to stop all technological transfer to Perodua. Daihatsu has a 20.93% stake in Perodua (a direct 20% stake and indirect stake of 0.93% via 18.5%-owned Daihatsu (Malaysia) Sdn Bhd). Both proposals are extended for the second time until end-Oct 18. Our target price implies 13.6x 2019F PE, which assumes UMW’s stake in Perodua at 48% post-completion of the 10% stake acquisition in Perodua from PNB. Entry price is RM5.80.
• Bermaz Auto (BAUTO MK/BUY/Target: RM2.60): Strong uplift from associate contribution. On the back of its strong performance in its 4QFY18 results, we expect the momentum to continue - driven by the ramp-up of CX-5 volume by its associates, notably its 30%-owned Mazda Malaysia Sdn Bhd (MMSB) driven by exports. The all-new Mazda 6 is slated for launch in 3Q18 while the CX-8 will only hit the market in 2QFY20 in complete knock-down (CKD) form. Management is still trying to list its 60.4%-owned Bermaz Auto Philippines (BAP) in the Philippines although we note there is no definite timeline yet. Given BAuto’s net cash position of RM261.5m (or 23 sen per share) and assetlight business model, we estimate a 75% payout for FY19-20F, which represents attractive yields of 5.9-6.6%. Our target price is based on a 13x PE pegged to its 2019F EPS.

Source: UOB Kay Hian Research - 22 Jun 2018