- Bank Negara’s latest measures to curb household debt should not have an immediate adverse impact on the auto sector. To recap, Bank Negara announced three immediate measures: (1) (1) Maximum tenure of 10 years for financing extended for personal use; (2) Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties; (3) Prohibition on the offering of preapproved personal financing products.

- The issue of rising household debt is not new. In January 2012, measures were taken to tighten lending guidelines, which affected the auto sector. This included:- (1) Revising loan eligibility to a maximum 30% of net income from gross income previously – this affected mainly the RM5000/month income bracket and the ratio actually increases along with the increase in income; (2) Stricter paperwork or income proof requirements. The impact from these measures has negatively impacted loan approval rate (which dropped to as low as 43% in Feb vs. an average of 51% prior to that), while loan processing period extended to almost a month from just a few days prior to the measure due to extensive documentations required.

- While auto sales still grew by 4.8% in 2012 (despite tighter loan approvals since Jan 2012), this has to be taken into context with the two supply crisis that hit the industry in 2011 i.e. Japan earthquake in 1Q11 and Thai floods in 4Q11 where it took the industry circa 6 months to recover from the aftermath of both natural disasters. Additionally, Perodua (sales of the Viva was the worst affected as its buyers comprise of the lower income bracket) was pro-active in shifting the focus on marketing and incentives to the MyVi model. Within four months from the implementation of the tighter lending measures, Perodua managed to arrest its volume contraction.

- Car price declining, volume normalising, shouldn’t debt build up too? Prior to the tightening of lending guidelines in 2012, TIV grew at an average 5.5% per annum (periods between 2004 – 2011), whereas for the 2-year period after the new guideline i.e. FY12-13F, TIV is expected to grow at average annual rate of just 3%. We project 2013 TIV growth of 1.5% while MAA projects a 2% growth - not too far off from our estimates, as the market expect TIV to normalised as a result of the 2012 measures. More importantly, car prices are falling (20%-30% targeted decline in the next 5 years) and coupled with normalising volume growth, these suggest a moderate debt build-up from the auto sector and little disruption to existing TIV expectations. Mirroring our view, Frost & Sullivan raised their 2013 TIV forecast by 6.3% to 638K (+1.7% YoY) from as low as 600K (-4.4% YoY) previously. The new forecast is now much closer our forecast of 637K (+1.5% YoY) and is a tad lower than MAA’s forecast of 640K units.

- Get in ahead of inflection point. June TIV is expected to be announced sometime this week and a recovery in sales volume (following weak Apr and May months given uncertainties triggered by election manifestos to reduce car price) should act as a strong catalyst. All key players under coverage- Toyota, Perodua and Nissan – indicated that bookings are now recovering, though no hard numbers are available at this juncture. Any recovery should see a follow through from strong pre-Raya sales rush in July and introduction of volume models thereafter.

- Our current OVERWEIGHT call on autos is premised on bottom-up stock picking. TCM (BUY, FV: RM7.50 share) is our top pick for:- (1) Structural market share expansion as it fills up gaps in its model line up (in the B-segment, A-segment, low-end C and MPV segments) which had existed for decades – leading to Nissan strongly outperforming industry growth in the next 24 months (Nissan FY13F vol: +50% vs. TIV: +1.5%); (2) Potential to qualify for EEV initiatives to be announced in the NAP, which will positively alter TCM’s cost structure and attract export volumes; (3) Potential M&As.

Source: AmeSecurities