Investment Highlights

• October saw sales bouncing back on a MoM basis. TIV rose 15% MoM (Sep: -21% MoM) and most carmakers saw a double-digit MoM rebound with the exception of Nissan.

• TIV was lower 2% on a YoY basis. The growth of 1% for the YTD period similarly reflects tepid market conditions. Honda was in the lead (+23% YoY) while Toyota (+11% YoY) and Proton (+6% YoY) gained some ground they lost last year. The laggards were Nissan (-31% YoY) and Mazda (-28% YoY).

• Three highlights from October:

1) Mazda breached the crucial 1K point for the first time in one year. Bermaz Auto (BAuto) launched the new CX-5 earlier in the month and priced the model cheaper than its immediate comparables. It also launched the seven-seater CX-9 last week: while contribution to domestic Mazda TIV is minor at less than 1% of annual sales, the Japan-imported model could serve to improve its net margin which dwindled to 7% (from 9-12% before).

2) Perodua buyers held back for two months in anticipation of the new Myvi. Early reception for the third-generation Myvi has been positive (5K in bookings as of mid-November, with most opting for the bigger 1.5L) and Perodua sales in the next few months should compensate for the lower numbers in Sep-Oct. We also highlight that while Perodua sales of passenger cars had mellowed, its Alza MPV has surprisingly seen stable sales (averaging 2.3K/month) this year. The Alza last saw an update over two years ago but is still the preferred MPV at its price point, with Proton MPVs selling at less than half the Alza's level.

3) Toyota is very slowly working its way back to health. While FY17 sales projection of 70K will have outdone its disastrous 2016 showing (64K units), the following year will be crucial as it aims to further strengthen sales before the second local Toyota plant comes onboard in 2019. Toyota had launched four facelifts and additional variants for several models (the key ones to TIV being the Vios and Hilux) and the long-paraded C-HR is set to debut early 2018.

• The loan approval rate stood at 53% in September. The YTD average of 53% is an improvement from the 51% seen 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.

• 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 - 20 Nov 2017