Investment Highlights

• January 2018 TIV was flat YoY and 19% lower MoM. The MoM drop is typical given the seasonally lower sales, and in terms of volume, it has hovered at this level (~45K) in January for three years now.

• We note three points of interest from January statistics:

1) Mazda sales rebounded to a near 2-year high with better SUV and passenger car sales. January sales of 1.3K units (+62% YoY, +83% MoM) was a steep improvement from the 711 units sold in December. This was the best monthly sales seen for Mazda since March 2016 and was driven by better numbers for the new CX-5. We reiterate that the challenge will be to maintain a base of 1K/month with stable sales for the CX-5 and support from several new models set to enter soon.

2) Perodua market share reached 40% for the first time to reflect the impact of the new Myvi. Myvi accounted for half of Perodua sales of 17.7K (+62% YoY, -12% MoM) in January. The company has reportedly delivered only 20K units of the 48K in bookings for Myvi. It has set a conservative growth target of 2% (to 209K units) this year, to reflect the continuing softness of the auto market.

3) The big beneficiaries in December predictably saw January sales drop. This was true for Toyota (-51% MoM), Honda (-28% MoM) and Nissan (-11% MoM). We also note that while Nissan saw its first YoY growth (of +29% YoY in January) since June 2016, this was largely the result of a low base and Nissan volume has otherwise seen a downtrend (to a range of 2-2.2K in the past few months, from 2.5-2.7K prior).

• The approval rate for auto loans stood at 52% in December with an average of 53% for 2017. This was a 2ppt improvement from the average of 51% in 2016.

• We project a 2-3% TIV growth this year. We remain NEUTRAL on the automobile sector with BUYs on Bermaz Auto and Pecca Group; and HOLDs on DRB-Hicom, UMW Holdings, Tan Chong Motor, MBM Resources, Sime Darby and a SELL on APM Automotive.

• 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.

Source: AmInvest Research - 26 Feb 2018