• The Royal Malaysian Customs Department announced yesterday that the sales tax would be exempted on certain parts that go into the assembly of a CKD car. The department clarified that the completed end-product would not be exempted from the sales tax, following a number of inaccurate reports in the media.

• The exemption is specific to certain components in CKD cars (specified as sedans, four-wheel drives, and other motor cars including station wagons and sports cars) in every category of engine size and type (petrol, diesel, electric and hybrid).

• Recall that the sales tax is collected only at the manufacturer’s level and eventually embedded in the final price paid by the consumer.

• The exemption is based on a bill [Proposed Sales Tax (Goods Exempted from Sales Tax) Order 2018] that has to be presented in parliament and is likely to be debated within the first session that runs till Aug 16. This would provide ample time for the implementation of the sales and service tax (SST) which was envisioned for September.

• The exemption would have broad impact on the sector as a big chunk of cars sold are CKD. The volume-heavy non-nationals (Honda, Toyota and Nissan) only have a handful of models that are CBU and the two nationals (Perodua and Proton) account for about half of TIV (FY17: 48%; Perodua 36% and Proton 12%). Conversely, total production in FY17 stood at 499,639 units against total sales of 576,631 units.

• However, at this stage the extent to which CKD producers can save costs from the exemption is uncertain. They would also have the choice of retaining these cost savings to bolster their own margins or pass it onto consumers by way of lower car prices.

• What remains certain is that prices will go up when the SST is reinstated in September, given that cars on the market will be subject to the sales tax. The “tax holiday” remains intact as a result and we should see the opportunistic buying continue to August after the huge sales bump seen last month.

• We retain a TIV projection of 2-3% and reiterate that the exceptional gains seen during the tax holiday would serve to compensate for the declines in the aftermath.

Source: AmInvest Research - 20 Jul 2018