Investment Highlights

• We are NEUTRAL on the auto sector with a projection of 2-3% TIV growth in 2018 and 2.0% in 2019. Stronger-than-usual sales in the 3Q and some seasonal support in 4Q would compensate for the flat Jan-April results. We identify four key items to monitor in the year ahead:

1) Companies to battle for pent-up demand. Buyers are set to rush in during the 3Q before the sales and service tax (SST) returns in September and having held off before the election for better certainty on policies that would affect their income. We understand that car prices could be raised by 2-3% if the SST is introduced at its previous rate of 10%. There will be opportunistic buying and selling until there is certainty on the quantum. Our checks with several dealerships in early June indicate that companies are offering substantial rebates and persuading customers to book as soon as possible in order to secure their cars during this short tax holiday. This is also an opportunity for companies to clear out unsold inventory. Among the recent launches taking take center stage during this period are the Perodua Myvi and Bezza Gxtra, Toyota C-HR, Nissan Serena S-Hybrid, Honda Odyssey and Renault Captur.

2) The ringgit strength is an opportunity to regroup and attack. We identify the key beneficiaries to be Bermaz Auto, Pecca Group, Tan Chong Motor (TCM) and UMW Holdings. Our house view projects for a stronger ringgit in 2018 and 2019 (based on rates of 3.94 and 3.88 for the ringgit/US dollar respectively). Additionally, lending costs are expected to remain as we project for the OPR rate to stay at 3.25% this year. We believe this presents the best opportunity for TCM to push a more aggressive strategy after two years of losses and an absence of the strong brand for Nissan. This would be a catalyst for us to upgrade the stock, which in 1Q18 rode on a stronger ringgit to cushion the continuing weakness in sales.

3) Margin-oriented SUVs to be the focus soon. We believe companies are pragmatic about the extent to which they can maintain the momentous volume expected in 3Q. The ones hoping to sustain this in the 4Q18/1Q19 would see margins give way. A number of them are hoping the excitement of a new model from the 4Q would warrant the higher price and serve to guard margins. Launches in store include the SUVs from Perodua and Proton, next to the facelift Honda HR-V. The local market for crossover SUVs has been dominated by Honda but the additions by Perodua and Proton will serve to carve their own turf in the name of long-term survival. Between the two, we believe Perodua will focus on sales while Proton will focus on perception. Perodua has readied production for Sep and will likely build on the competitive features seen in the recent Myvi. Proton will first offer an imported version of the Geely Boyue while the plans for localization eyed in 2H2019 will depend on the market reception.

4) UMW has until end-October to pass its first hurdle in owning MBM Resources. UMW had secured the majority vote from Med-Bumikar in May but a task force established by the latter will fight for a better offer. The key issues to resolve are Daihatsu’s dissent to having one party controlling Perodua and the offer price of RM2.56/share for MBM. We believe there would be pressure on UMW to raise its offer price even though it has stood firm on not doing so. We believe the deal would not materialize unless UMW relents on this.

• We consider our TIV projection to be on the bullish side given the lackluster growth seen for the last three years. 2018 was supposed to be the big rebound but the sector still suffers from a lack of genuine catalysts to drive sales. We believe the longterm catalysts for an upgrade on the sector are: (1) better consumer sentiment to drive demand; (2) for companies to be in a more solid financial position to catalyze demand with new models and better market visibility; (3) a better macroeconomic environment to ease the obtaining of auto financing.

• The short-term catalysts that could come into play are:

1) Government efforts to boost consumers’ disposable income and improve appetite for big-ticket items. We believe these would focus on the lower-to-middle income segment, for them to access mass-market cars that are already priced at very competitive levels;

2) Policy that sets up a stronger export market for the long-term growth of national players. Perodua and Proton both have negligible regional presence and the domestic market offers limited opportunities given its small size and stage of maturity. Note that Proton has set ambitious targets given that the success of Geely’s participation hung on its ability to use Proton to penetrate the wider region. We note that the key aspects for the two to do well regionally are an attractive product (necessitating a technical partner with a more global worldview, i.e. Daihatsu for Perodua and Geely for Proton) and receptive foreign markets (which would require a more symbiotic relationship between countries, and less dependence on protectionist policies).

Source: AmInvest Research - 20 Jun 2018