Investment Highlights

• July 2018 TIV shot up to 68.5K units, which the MAA said was the second highest monthly sales seen in the sector’s history. Sales were up 6% MoM and 41% YoY as buyers rushed to secure zero-rated GST cars. Sales which averaged 66K in June-July were 48% higher than the level seen in the first five months of the year.

• YTD sales were 8% higher YoY as the “tax holiday” provided a significant lift. We maintain a TIV projection of 2-3% for 2018 and 2.0% in 2019. We expect an average sales of 66K units per month during the 3-month tax holiday period and 43K for the months thereafter. Strong sales should continue up to August though companies would be forced to rely on new launches or incentives to mitigate some of the exceptional declines to come.

• We note the following points from the July figures:

1) Most saw a double-digit MoM bump with the notable exceptions being Toyota and Mazda. Toyota came off a high base in June (when sales leapt 466% MoM). Mazda sales fell 21% MoM as SUV sales dropped 37% MoM to 768 units (mitigating a 37% improvement in passenger car sales, which rose to a new YTD high). We believe Bermaz rode on its maximum allocation of ~700 units/month for the CX-5 and faced a run-out of the old CX-3, which should see better numbers from Sep (with a facelift version launched mid-August at a very competitive price of RM121K). Note that Mazda should also see favourable sales extend for 1-2 months after the reintroduction of the SST given its commitment to absorb the cost (for bookings made before Sep 1, but delivered after that date). We emphasize that Mazda is in a solid place despite the MoM slide in July with YTD sales up 44% YoY and selling an average of 1.1K every month vs. only ~800 monthly last year.

2) Nissan is soaring on the new Serena but is also using the tax holiday to clear out its older models. Tan Chong Motor guided that it has over 4K bookings for the Serena to anchor Nissan sales up to January 2019. We note that it is taking advantage of the tax holiday to pare down its other models. Sales for its other key segments have also shot up: with the average sales of passenger cars, SUV/4WD and pick-ups from June-July coming in higher by 200%/68%/34% than their respective Jan-April averages.

3) Everyone won from the tax holiday but there are a few standouts. Perodua had the additional benefit of a wildly popular Myvi to sell 23.8K units in July, its highest monthly result since Dec 2016 (exceeding the previous benchmark of 22K in May 2018). Previous laggards such as Proton and Nissan found an opportunity to rid of hard-to-sell cars without compromising their own margins. Beyond the mass-volume players, we note that the outperformers were Mitsubishi, BMW, Mercedes-Benz and Volvo with their May-June average sales coming in 54%/62%/65%/141% higher respectively than their Jan-Apr average (vs. 48% for TIV).

• Car prices are expected to go up by a small quantum when the SST is reintroduced in September at 10%. We note that the biggest beneficiaries during the tax holiday will also be the companies to see their sales decline most afterwards, as opportunistic buyers would have secured their car purchases earlier.

• The approval rate for auto loans stood at 60% in June. The average of 54.9% for the 6M18 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. We have a BUY on Bermaz Auto (BAuto), Pecca Group, MBM Resources and Tan Chong Motor. 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, MBM could start to see better valuations as the cloud on its loss-making alloy wheel unit dissipates, and Tan Chong has started to find its footing after two years of losses.

• We have HOLDs on Sime Darby, APM Automotive, UMW Holdings and DRB-Hicom.

• 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 - 20 Aug 2018