- The 13th GE outcome removes a key policy risk overhang in the auto sector. As a recap, the sector essentially faced the risk of being gradually shut down with the potential abolition of excise duties – in particular, the auto component sub-sector and the vehicle assemblers.

- On top of this, the gap-up in MYR yesterday (against both the JPY and USD) is also a significant positive for the sector. TCM imports c.60% of its CKD kits, of which 70% are imported in USD and the rest in JPY. UMW Toyota, meanwhile, (60% imported components), imports all its CKD kits in USD.

- Our top picks are kept: We continue to like TCM (BUY, FV: RM6.40/share) for:-

- (1) Strong industry outperformance (FY13F volume: +40%, FY13F earnings: +103%);

- (2) Potential new contract assembly wins from a foreign OEM;

- (3) Valuations are way cheap at 11x FY13F earnings vs. UMW’s 16x. TCM is now positioned as a solid proxy to the auto sector;

- (4) Best proxy to the stronger MYR – an every 1% change in JPY and USD impacts bottomline by 6%.

- Another key sector pick which would have suffered significantly from the abolitio of excise duty is MBM (BUY, FV: RM4.60/share). Continuation in policy underpins MBM’s appeal:-

- (1) Expansion into vehicle assembly utilising its comprehensive manufacturing licence;

- (2) Reduced risk of Perodua significantly losing market share to foreign marques had excise duties been abolished – as abolition of excise duties would have narrowed Perodua’s pricing advantage significantly;

- (3) MBM is a key beneficiary of the weaker JPY – an every 1% change in JPY impacts bottomline by 2%-3%.

- Maintain OVERWEIGHT on the auto sector. While we still expect car price to be gradually reduced in the near term, this should come with:- (1) Increased localisation by foreign marques – case in point, Nissan Almera which has achieved significantly higher localisation at 60% vs. typical non-national B-segment localisation of 40%; (2) More competitive pricing by component suppliers from December 2012, i.e. 5%-15% price reduction on component supplies to national marques.

Source: AmeSecurities