Investment Highlights

• May TIV was down 9% MoM and 15% lower YoY. Buyers chose to hold off purchases given the election in early May and subsequent zeroization of the GST from June. We note that May was an exceptional month given the various uncertainties at play and the ones to see a gain in sales did so at the expense of margins. Those who offered incentives to entice buyers before June include Honda (absorb the GST charge on several models), Nissan and Perodua (refunds or cash rebates) and Proton (service vouchers equivalent to the GST charge). While the others lost out in May, we emphasize that the real battle is to capture the pent-up demand during the 3Q period.

• We highlight the following points from May:

1) Perodua bit the bullet to see its best monthly sales since Dec 2016 and capture a historical market share of 51%. It made the decision to offer GST rebates after seeing terrible sales in the 5 days after the election and this cost the company around RM40mil (based on an average rebate of RM2.5K on 16K cars), its head of sales said in an interview with Paul Tan’s Automotive News. Additionally, Perodua guided that the new model anticipated for the 4Q may not be launched this year. We believe the company is focused on maximizing sales during the tax holiday and would only be incentivized to push the new SUV closer to the 4Q when sales could drop substantially upon the return of the SST.

2) Mazda to see sales rebound after a blip in May. Mazda refrained from providing GST rebates and sales dropped to 616 units during the month. We understand that the strong orders from June will more than compensate for this. It has achieved sales of over 1K/month for 6 of the 8 months since the CX-5 was launched and the YTD result (up 31% YoY in Jan-May) reflects the SUV’s role in lifting Mazda back to its feet.

3) Toyota also lost out. UMW Toyota only advertised a price reduction from June. Sales dropped significantly (down 63% MoM) as its two key segments fell: sales of passenger cars were halved and sales of pick-up trucks dived 63% on a MoM basis. It should rebound from June and slowly normalize as the year progresses.

4) Nissan saw a huge MoM bump from the Serena but YTD sales still sluggish. Sales rose 30% MoM on strong MPV numbers (up to 824 units, more than double of last year’s average). The new Serena debuted in April and has secured 2.5K bookings as of early June (with about a third delivered). However, total Nissan sales in May of 2K units is still well below its historical average (2016: 3.4K; 2017: 2.3K) and the company’s goal of seeing flat growth for the year is still a tough one given the YTD decline of 17% YoY.

• Companies to battle for pent-up demand during the tax holiday. 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 centre stage during this period are the Perodua Myvi and Bezza Gxtra, Toyota C-HR, Nissan Serena S-Hybrid, Honda Odyssey and Renault Captur.

• The approval rate for auto loans stood at 52% in April. The average of 54.9% for the 4M18 period is higher than the 52.9% seen in 2017.

• We maintain a TIV projection of 2-3% for 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-May results. We have a BUY on Bermaz Auto (BAuto), Pecca Group and MBM Resources. BAuto is expected to see better domestic sales, margins and associate earnings; Pecca remains a key beneficiary of Perodua’s success as the sole supplier of its leather seats, and MBM could start to see better valuations as the cloud on its loss-making alloy wheel unit dissipates.

• We have HOLDs on Tan Chong Motor (TCM), Sime Darby, APM Automotive, UMW Holdings and DRB-Hicom. Of these, we are keeping a close eye on TCM (for the sign of a more aggressive strategy for its launches and the Nissan brand), Sime Darby (for a more proactive stance on the auto distribution and divestment of non-core assets) and UMW (the group’s growth plans are comprehensive and inspire confidence but valuations for the stock remain stretched at the current level).

• 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 - 22 Jun 2018