Investment Highlights

• September saw declines across the board. TIV fell 21% MoM and the MAA attributed this to the shorter working month and stringent approval rate for HP loans.

• We believe prospective car buyers are also holding back for a month or two for the year-end promotions to come. The worst declines in September were seen in Proton (-30% MoM), Toyota (-24% MoM) and Perodua (-23% MoM). Smaller declines were seen in Honda (-19% MoM), Nissan (-16% MoM) and Mazda (-9% MoM).

• TIV was 15% lower on YoY basis. Carmakers saw a similar trend with the exception of Honda (+5% YoY).

• The general trend remains with the best YTD performers being Honda (+24% YoY), Proton (+12% YoY) and Toyota (+11% YoY). Nissan (-32% YoY) and Mazda (-31% YoY) continue to lag.

• TIV in 3Q17 (July-Sept) was lower by 1% YoY. Perodua largely tracked the same trend (-3% YoY) and sales in the previous corresponding period rode on the launch of the Bezza at the end of July 2016.

• Two names bucked the TIV trend in 3Q: Honda (+11% YoY) continues to ride on the weakness of its peers (mainly Toyota and Nissan) and is building strength from its new models (6 models aimed for 2017 with four launched from Jan to June), while Proton (+18% YoY) benefitted from a low base (3Q16 sales plunged 50% YoY to a personal worst; two key models were launched during the quarter: the Persona at end-August and Saga at end-Sept).

• Nissan (-22% YoY) and Mazda (-19% YoY) saw a lacklustre quarter, while Toyota (-10% YoY) was hit by poor sales in September (its worst YTD showing).

• The loan approval rate rose to 55% in August, the highest since January’s 58%. The average of 52% for the YTD period is a slight improvement from the 51% in 2016.

• We maintain NEUTRAL on the Automobile sector with BUYs on Bermaz Auto (BAuto) and Pecca Group, and HOLDs on DRB-Hicom, 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 - 19 Oct 2017