• The government announced on Wednesday that the goods and services tax (GST) rate would be reduced to 0% from 6% in June. Car prices would have to be cut by a similar quantum to abide by the ruling. Our comments below:

1) Companies will not likely announce an official price cut until they have clarity on the quantum and timing of the sales and services tax (SST) that would re-enter. Our channel checks indicate that companies have not been forewarned on this. The final car prices following the substitution of the GST with the SST would depend on the quantum of the SST, which previously stood at 10% for cars.

2) Customers rushing into the market in the 1-2 months when the GST is potentially absent, and without an alternative in place sales could spike. We believe the overall sales trend would not alter dramatically, as the spike would be followed by a dip.

3) Companies may raise prices by a small measure if a 10% SST is eventually reinstated. This would hit the lower-to-mid-end segments and companies may be pushed to offer incentives to compensate for the price hike, mirroring the similar situation when prices were raised in early 2016. Alternatively, companies could choose to absorb the marginal increase, especially in segments and models that are most price-sensitive.

• Proposals by the government aim to assist specific groups, and not to lift the local auto market. Recall that the Pakatan Harapan manifesto proposed to lower excise duties on imported passenger cars below 1,600cc (the excise tax is currently 75% for passenger cars below 1,800cc). This would only be available to first-time car buyers and apply to only one car within a household earning less than RM8,000/month. Aside from this, fuel subsidies would only be offered to drivers of cars below 1,300cc and motorcycles below 125cc.

• We believe the government would be pragmatic and refrain from incentivizing the wider auto market given the issues with congestion, with several proposals from the manifesto directed towards encouraging the use of public transport and e-hailing services.

• Nonetheless, a higher level of disposable income (as a result of the GST removal, among other things) would support the demand for cars. We maintain a projection of 2- 3% TIV growth this year, premised on stronger sales in the 2H led by better clarity on the policies affecting car prices and a number of key launches slated for that period. 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, Sime Darby and APM Automotive.

Source: AmInvest Research - 17 May 2018