Investment Highlights

• August TIV was up 7% MoM, down 1% YoY. It proved to be an uneventful month for most, but Honda (+13% MoM) and Proton (+8% MoM) saw notable gains. The two names also beat the trend on a YoY basis, for which most companies saw a double-digit decline due to the high base (August 2016 saw TIV rebound 23% MoM after a post-Hari Raya slump in July).

• We note three things of interest from the August numbers:
  1. Proton sales remain volatile, at best. The improvement in August (+8% MoM) was preceded by an exceptional drop in July (-18% MoM). YTD sales were up 18%. 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 comes despite a line-up of key models that are less than a year old, with the most recent being the new Iriz launched in June.
  2. Honda remains the leader in the non-national segment. Sales were up 27% YoY in the YTD period. It continues to ride on the weakness in its peers (Toyota and Nissan) and is building strength from its new models (6 models aimed for 2017 with four launched so far: the BR-V in January, facelift City in March, new CR-V and facelift Jazz in June). Honda continues to stake its claim as the leader of the non-national segment with a market share of 36%, while Toyota (23%) and Nissan (10%) trail behind.
  3. Mazda saw a small gain in August but sales remain below the 1K threshold. The company may have seen a boost from the clearance of existing CX-5 (ahead of the entry of the second-generation model next month) as SUV sales in August rose 15% MoM.
• Banks are still just as strict on auto financing. The approval rate for loans on passenger cars tightened 2ppts to 52% in July. The average rate of 52% for the YTD period is a slight improvement from the 51% in 2016.

• 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 in October, a return to push for M2 sales 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 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 Sept 2017