Investment Highlights

• Feb 2018 TIV declined 9% MoM and 4% YoY. Unexciting sales are typical in the initial months of the year, as many buyers wait to be incentivized by new car models and festivity-time discounts.

• We note three points of interest from Feb:

1) Perodua scored sales of >17K units for a second month on the popularity of the new Myvi. Myvi accounted for 38% of the 17.1K units Perodua sold in February. Bookings for the new Myvi now stand at 60K units against 28K units delivered (from 48K in bookings and 20K in deliveries in January).

Perodua sales should remain stable up to March and could spike from April, when Perodua’s suppliers adjust to produce more of the 1.5L variants that account for up to 85% of bookings for the Myvi.

We emphasize that Perodua will still need to fight hard to see the targeted 2% sales growth for 2018 (to 209K units or an average of 17K units/month— the level seen in Jan & Feb), counting on the Myvi, and bump up sales from the festive months. To a lesser extent, it should see support from the upcoming Alza facelift (the model has consistently sold around 2K units/month, owing to its position as the cheapest 3-row MPV in the market) and Perodua SUV to debut later this year (we believe the company will be targeting to sell 2K units/month).

2) Mazda sales topped 1K with 800 SUVs sold. We understand that Bermaz Auto sold 650 units of the new CX-5 last month, above the average of 550/month seen in the previous two months and past the 500/month target set. Feb sales were also higher 120% YoY as the previous corresponding month was a multi-year low with only 460 units sold. Strong CX-5 sales have lifted the contribution from SUVs to 80% of total sales from 64% in the months prior. We believe Mazda will continue to hold up numbers from its flagship model while aiming to raise sales for its other key models with the launch of new variants for the M2, M3 and CX-3 from April.

3) The other major Japanese marquees saw a YTD decline but it was worse for Toyota and Honda. Toyota (-27% YoY in YTD) and Honda (-7% YoY) suffered from a lack of catalysts during an especially slow period for sales, while Nissan (-2% YoY, similar to TIV’s) saw sales plateau at or below the 2K mark.

4) Proton sales fell 19% MoM to hit a new low of 3.9K in Feb. Proton looks to regain some ground with a CBU version of the Proton Boyue SUV that is eyed for launch later in the year.

• The approval rate for auto loans stood at 54% in January, above the average of 53% for 2017. The amount of loans applied in January was the highest level seen since June 2016 which we believe was due to a boost in applications for the new Myvi.

• We project a 2-3% TIV growth this year. We remain NEUTRAL on the automobile sector with BUYs on Bermaz Auto and Pecca Group; HOLDs on DRB-Hicom, UMW Holdings, Tan Chong Motor, MBM Resources and Sime Darby; and 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 - 21 Mar 2018