• The central bank raised the overnight policy rate by 25bps to 3.25% on Thursday. It highlighted that Malaysia's economy is expected to remain strong with domestic demand continuing to be the key driver of growth. It has raised the floor and ceiling rate for the OPR to 3.0% and 3.5% respectively.

• We opine that a 25bps hike in interest rate will not significantly affect sales of vehicles. However, any subsequent increase in the interest rates for new vehicle loans may dampen the demand for cars that rely primarily on affordability. We maintain our projection of a moderate 2–3% increase in TIV for 2018.

• We note three key points following the rate hike:

1) Proton and Perodua most vulnerable. Proton sales may slip further given the declining interest in the marque and the absence of new models until the Proton Boyue. Perodua's sales growth target of 2–3% will be hard fought. This target has weighed the anticipated volume boost from the new Myvi (which has seen tremendous success, with 36K in bookings and 11K deliveries to mid-January) in addition to the stringent approval process faced by its buyers (Perodua said less than half of loan applications go through compared to >60% in better times). Affordability is still a major factor for its buyers with close to 90% of Perodua cars priced below RM55K.

2) Minor reprieve from counter strategies. We understand dealers have put forward alternatives such as leasing arrangements and company-owned financing, although the number of buyers to opt away from the conventional bank loan is still few.

3) Auto sales are still tepid. We note that monthly sales in 2017 often fell to an unexciting baseline in the absence of a seasonal boost. The monthly average for the year was flat from 2016 (at 48K/month), and the five months which saw sales exceed that level had benefited from a seasonal upswing.

• 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 a SELL on APM Automotive.

Source: AmInvest Research - 26 Jan 2018