Investment Highlights

• April 2018 TIV was down 6% MoM but up 10% YoY. Sales in April were generally flat or down by a single digit on a MoM basis for most, with the exceptions of Honda and Nissan (which saw larger-than-average gains in the preceding month), and Toyota (which has regained ground after seeing exceptionally weak numbers in Jan-Feb).

• We emphasize the following points from the YTD result:

1) Perodua and Mazda remain the leaders, while the laggards were Proton, Toyota and Nissan. The first few months of the year are a seasonal downtime for the sector, and the two leaders benefitted from exceptional factors (Perodua on the new Myvi that was launched in Nov 2017; and Mazda on the low base that will persist till Sept 2018).

2) Mazda has successfully maintained sales of >1K since for 6 of the 7 months since the CX-5 was launched. The challenge from here is to boost its numbers for the passenger cars sub-segment. SUV sales (comprising the CX- 5, CX-3 and CX-9) have been healthy but passenger cars (comprising the M2 & M3 mainly) have dipped slightly from Sep 2017. We believe Bermaz Auto is cognizant of this and will position more strongly the new variants (for the M2, M3 and M6) in the coming months.

• We note that Perodua has slightly exceeded its FY18 target of a 2% growth (4M18 sales make up 36% of its projection), while Honda, Toyota and Nissan are slightly below their targets of flat sales growth (with 4M18 sales accounting for 30%, 26% and 25% of their respective full-year projections).

• We believe the competition will intensify in the 2-3 months from June while the GST awaits the substitution of the SST, which will reportedly be introduced at its old rate of 10% and necessitate a 2-3% price increase according to our channel checks. While the reduction of the GST to 0% will be implemented across the board from June 1, several companies took the additional measure of doling out incentives to entice buyers earlier: Honda had offered to absorb the GST charge on selected models up to end-May, Nissan and Perodua offered refunds or cash rebates, while Proton offered service vouchers equivalent to the GST charge.

• The approval rate for auto loans moderated to 51% in March after a spike in Feb. The slight improvement in the 3M18 average (to 56% from FY17’s 53%) follows the mellow demand during the period (loan applications dropped after January).

• The 2018 NAP meant to be tabled mid-2018 will likely be shelved or reviewed by the new government. We believe the government would be pragmatic and refrain from incentivizing the wider auto market given the issues with congestion. Proposals set out its manifesto targeted specific groups and leaned towards encouraging the use of public transport and e-hailing services.

• We retain a conservative projection of a 2-3% TIV growth this year, factoring in a stronger-than-usual sales during the 3Q and some seasonal support in the 4Q to compensate for the flat 4M18 results. We remain NEUTRAL on the automobile sector with BUYs on Bermaz Auto, Pecca Group and MBM Resources.

• 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 - 24 May 2018