Investment Highlights

• March 2018 TIV was up 23% MoM but declined 7% YoY. The unexciting result reflects the tepid consumer sentiment as buyers wait for new car models and festivity-time discounts. Most players bounced back in March but due to the slow first 2 months of 2018, the first quarter TIV declined by 4%YoY. The exceptions were Mazda and Perodua which saw a YTD increase in sales of 65% YoY and 11% YoY respectively.

• We note three points of interest from March: 1) Perodua sales hit a 13-month high with 20.7K units as deliveries for the 1.5L Myvi kick in more visibly. Recall that Perodua’s suppliers demanded time to adjust for a higher production of the 1.5L Myvi, that accounts for 85% of bookings (vs. Perodua’s projection of 45% at the time of the launch). We believe Perodua sales should maintain at this level (with a market share of >40%) for the months ahead of the seasonal bump from Hari Raya in July, as it can rely on a solid 3-4 months’ order book for the new Myvi (it had 32K in bookings to deliver from mid-March against a delivery rate of 6.5K-9K/month). We believe these coming months will be the main support for Perodua to reach its targeted 2% sales growth for 2018 (an average of 17K units/month) as the Perodua SUV debuting later this year may only serve to pick up Perodua’s momentum from 2019 (and more so for margins than volume; we believe the company may target to sell 2K units/month) and the Alza facelift (likely to introduce several cosmetic changes) will not serve as a major catalyst. 2) Mazda’s recovery from the CX-5 is seen in the 65% YoY improvement in its 1Q18 sales. Sales have topped 1K/month for five of the six months since the new CX-5 entered in Oct 2017. It should be an easy feat to maintain its trend of a YoY improvement up to September (given the low base: Mazda sales were below 1K for a stretch of 11-months to Sept 2017), but beyond this point it will rely on the new variants launched for other key models (M2, M3 and CX-3) from this month. 3) Proton sales are floundering as expected, declining 34% YoY in the first quarter. The focus has for now shifted from sales to cost cuts (it is demanding a 30% discount from its suppliers) and the customer experience (it aims to raise the number of 3S/4S centres to 109 by year-end from 75 in 2017), to prepare for the Boyue SUV eyed for 4Q18.

• The sequential drop in 1Q18 from 4Q17 is not unusual (this has been the trend for a least 5 years), but the YoY drop is reflective of the market’s weakness today (1Q usually displays a small single-digit YoY growth, with the impact of the GST introduction distorting the 2015/16 results).

• The approval rate for auto loans spiked to 62% in February as applications dropped to its lowest point in at least five years. This followed the spike in loan applications in January (the highest since June 2016) which we believe was due to a boost in interest from the new Myvi.

• We project a conservative 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 - 20 Apr 2018