Investment Highlights

• We remain NEUTRAL on the automobile sector in 2018 but we are projecting a stronger upswing following two years in the doldrums. We are forecasting a TIV growth of 5-7% (vs. MAA's 4.9%) as the mass-market brands plot a clearer rebound from the plunge in 2016. 2017 was far from the turning point some had predicted with sales for the year looking to close with a 2% growth at best. There were few real winners. Honda fought hard by launching four models in the first half alone and leveraged successfully on the weakness in its peers. Toyota and Proton saw double-digit growth but both failed to regain significant ground after being the two worst performers in the previous year. Perodua, regarded as the cornerstone of Malaysia's auto market with the single-largest market share of 36%, looks to more aggressively cement its position in 2018 with a third-generation Perodua Myvi launched recently and ample time to launch its SUV (which would be a first from a local brand) as Proton takes its time to put down the roots for the Boyue here.
• This is the year to fight or die. Perodua has raised the bar with the new Perodua Myvi that is cheaper than its comparables and has safety features to rival cars that are nearly double its price range. We believe carmakers targeting the mass market will need to strive to include similar features while keeping prices low, cognizant that the typical customer is looking for a car that is built for safer urban driving and minimizes spending on fuel. This will also be the year to look out for the Perodua SUV. It will attempt to take a bite of the SUV market, a mainstay of Honda, and will likely price it below the RM80K point. The SUV segment has been a defensive part of the passenger car market: growing between 9% and 51% in the past four years. Toyota looks to kick-start the new year with the C-HR, its boldest move to also claim a stake of the fast-growing market for urban SUVs. This will be a crucial year as Toyota aims to prop up sales before the second local Toyota plant comes onboard in 2019. The 1.8L C-HR imported from Thailand will go head-to-head with the popular Honda HR-V and Mazda CX-3. UMW will soon announce official prices after a long wait since road shows that commenced in August 2017. We believe Honda will not be complacent in defending its SUV turf, which provides a stronghold having accounted for a quarter of its sales. We believe this will be the year Nissan needs to strike back after seeing its sales and market share drop drastically for two years. Tan Chong Motor (TCM) has not indicated a clear plan but past Nissan sales have been led by the Almera, X-Trail and Navara. The high level of inventory (RM1.3bil at end-Sept) for TCM may limit its ability to take on new stock, although we believe it is crucial for the company to go on the offensive in the face of continued declines in Nissan and persisting net losses. The scandal involving inspections by uncertified technicians in Nissan Japan should have a minimal impact on the Malaysian market, given that the CBU units imported directly from Japan take up a small portion of the volume sold here. Many are coming out of the tough period that followed price hikes, which were necessitated by costs that increased on fluctuations within currencies and commodities. We note that interest costs could go up for companies with significant debt, if the central bank raises the overnight policy rate (OPR) next year. Our house projects two hikes of 25bps each in 2018. Companies could be forced back into a defensive position if margins turn into their primary concern.
• Now is the time to see real reform in Proton. New CEO Li Chunrong's immediate priority will be to lay down the roots for the Proton Boyue to come into market by 2019. This will be the cornerstone of the long-term roadmap for the company. There will be no new Proton models and sales will tumble even further; the addition of five new models in 2016 provided only a momentary boost. In recent months, the government has made bold declarations that Proton's workforce will increase premised on a projection of annual sales of 500K within the next decade. The company has also signalled that hybrid and electric vehicles may be part of the long-term roadmap to take it to this ambitious sales target.
• Consumers will still hold back from big-ticket items. The government has held back from announcing incentives within its annual budget aimed at lifting the local automotive market for at least two years. The chief concern behind such incentives would be the survival of our local auto companies and the jobs provided. Perodua has been performing remarkably while efforts should be underway to build Proton into a more self-sufficient company. The deduction of 2ppts in the income tax rate for those earning between RM20K and RM70k annually in 2018 will see the group's disposable income lifted by RM300 to RM1K. However, the reduction in employee's contribution to the EPF fund by 3ppts to 8% was not extended past 2017. All things considered, we believe there will not be a significant shift in the consumer sentiment for big-ticket items such as cars. The ability for consumers to pay is still a concern for banks, given the average approval rate for loans on passenger cars of 53% for 10MFY17 (up 2ppts from the previous year's average).
• The catalyst for an upgrade on the sector to OVERWEIGHT would be a visible recovery in auto sales. This would rely on: (1) better consumer sentiment to drive the demand for new cars; (2) companies to be in a stronger financial position to catalyze demand with new models and better market visibility; (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 severe decline in consumer sentiment; (2) a steep weakening of the ringgit that threatens companies' margins and necessitates price hikes; (3) a visible tightening by banks on auto financing to constrain the demand for cars.

• We maintain NEUTRAL on the automobile sector with BUYs on Bermaz Auto and Pecca Group; and HOLDs on DRB-Hicom, UMW Holdings, Tan Chong Motor Holdings, MBM Resources, Sime Darby and APM Automotive.

Source: AmInvest Research - 19 Dec 2017