- MAA released May TIV (total industry volume) numbers yesterday, which registered at 49,634 units, down 5% MoM and -15% YoY. YTD May TIV stood at 259,787 units, which still represents a 6% YoY increase. If annualised (at 623,489), TIV already accounts for 98% of our full year projection of 637K units and could entice upgrades in the coming months. New volume model launches such as the new Vios, basic variants of Proton’s models and Nissan’s affordable MPV should provide another leg up for the sector in 2H13.

- Uncertainties kill demand: While we understand from industry players that there was some recovery in sales after the General Election, sentiment was dampened by the incumbent government’s promise to lower car prices (publicised extensively by the media), which contributed to an extended wait-and-see period, starting somewhere in March-April period and apparently lasting up till May.

- From here onwards, we expect the gradual introduction of cheaper variants in the market, on top of promotions e.g. downpayment rebates and free maintenance, to catalyse a strong recovery in sales volumes. For instance, Toyota sales were up strongly in May i.e. +15% MoM vs. industry’s -5% given promotional rebates of RM2,000 - RM5,000 undertaken by Toyota specifically for the month of May. We expect the rest of the players to follow suit in the coming months to capture the demand rush ahead of Raya festivities in August, and as “price reduction” activities gain further momentum.

- Being subtle vs. being clear: The subtle strategy to effectively reduce car price by introducing lower variants – be it by way of increasing localisation, sourcing cheaper parts or simply introducing a basic variant – would have little impact on second hand values of existing models, in our opinion, and once this trend is clearer to consumers, we think pent-up demand should return pretty strongly. More importantly, regulators are now managing expectations by making it clear that the reduction in car price will not have anything to do with excise duty adjustments. As cheaper pricing is backed by lower duty costs (as a result of higher local parts sourcing) or cheaper parts pricing by local vendors, we do not expect major impact on margins for auto manufacturers/distributors, though we do not rule out a more pronounced impact for dealerships (as incentives for hitting sales targets are awarded retrospectively either on monthly basis or up to a 6 months period).

- Maintain OVERWEIGHT on the auto sector: TCM (BUY, FV: RM7.50/share) remain our top sector pick. Key catalysts for TCM include: (1) Introduction of “affordable” MPV variants in early 3Q13; (2) Introduction of A and B segment models in FY14-15; (3) Possibilities of clinching new contract assembly business domestically; (4) Possibilities of becoming a an export hub for Datsun in the next 2 years.

- We also like MBM (BUY, FV: RM4.60/share) for a cheaper access to Perodua (FY13F PE of 10x vs. UMW’s 16x), which is a big beneficiary of the weaker Yen, as well as exposure to MBM’s comprehensive manufacturing license. Key catalysts include:

(1) NAP announcement on Malaysia’s EEV initiatives and incentives; (2) Franchise wins, which gives MBM better distributorship margins vs. 1%-2% dealership margins currently; (3) Introduction of new models byProton and Toyota which will benefit MBM’s auto part division albeit at the expense of margins; (4) Further cost down initiative at Perodua – another 17% cost reduction targeted by FY14 after a 12% reduction achieved in 1Q13. MBM is a net beneficiary of parts price reduction as Perodua accounts for 60% of earnings vs. 20% from its auto parts division.

Source: AmeSecurities