• July TIV was 3% lower MoM and 14% higher on YoY basis. The unremarkable MoM movement follows the usual post-Hari Raya trajectory, while the YoY hike is due to improvements in sales of Perodua, Proton, Honda and Toyota. YTD TIV was 5% higher YoY. We maintain our projection for a TIV growth of 2% (to 592K units) in 2017 with the anticipated boost from new models by Toyota, Honda, Mazda and Perodua.

• Two key highlights from July numbers:
  1. Proton sales have been volatile, at best. July sales dropped 18% MoM in July to below 6K units. A short stretch of growth in the months of May and June was preceded by six months of zero or negative growth on a MoM basis. Proton's performance has been volatile despite a line-up of key models that is less than a year old, with the most recent being the new Iriz launched in June. It is still a while before the arrival of the Proton Boyeu SUV, which is eyed for end- 2018/early2019, priced below the RM100K mark. This would position it next to the Toyota Rush, as well as Honda HR-V and BR-V.
  2. Honda continues to be the standout. Sales were higher by 29% YoY in the YTD period against 5% for TIV. Among its closest peers: Toyota has seen some recovery (up 22% for the YTD period; the low base effect was especially pronounced in the first four months of the year, sales in the previous corresponding period fell to a multi-year low of 3K vs. the historical average of 8K/month) while Nissan is still in a free fall (down on a MoM basis for 12 consecutive months now). Honda continues to capitalise on the weakness in the latter two and is building strength from its new models – 6 models aimed for 2017– with four already launched so far: the BR-V (January), facelift City (March), new CR-V and facelift Jazz (June), with its market share of the non-national side holding steady at 36%.
• Banks are still stringent on auto financing. The monthly approval rate for loans on passenger cars averaged 51.8% over a 12-month period until June 2017, and this is on par with the average for 2016. The approval rate eased to 54.4% in June 2017, which is regular for months when demand is noticeably weaker (i.e. the rate spiked to 57.8% in January).

• We maintain NEUTRAL on the Automobile sector with a BUY on Bermaz Auto (BAuto) and HOLDs on DRBHicom, UMW Holdings, Tan Chong Motor Holdings, MBM Resources and APM Automotive.

• We reiterate that Mazda needs to restore sales for three key models in order to execute a meaningful recovery: the CX- 5, M2 and M3 (which together form nearly 80% of its TIV). To this end, we believe the CX-5 launch at end-September, a return to push for M2 sales (after securing some incentives) and a stronger production volume for the M3 from August will together bring a marked improvement in monthly sales come 4Q.

• The catalyst for an upgrade on the sector to OVERWEIGHT would be a visible recovery in auto sales. This can be achieved with the amalgamation of: (1) better consumer sentiment to drive demand for new cars; (2) companies to be in a better financial position, which would require margins to be fortified on a stronger ringgit and overall lower costs; (3) a better macroeconomic environment to ease the obtaining of financing for a new car. Conversely, we may downgrade the sector to an UNDERWEIGHT if: (1) sales erode further on a decline in consumer sentiment; (2) a further weakening of the ringgit to test companies' already precarious margins; (3) a further tightening by banks on auto financing to constrain the already poor demand for new cars.

Source: AmInvest Research - 21 Aug 2017