- TIV hits a record high in July: July TIV was even stronger than our earlier estimate of circa 67K, officially registering at 68,431 units (+28% MoM, +15% YoY) based on data released by MAA. Whilst July 2013 arguably reflects the typically strong pre-Raya sales rush, our analysis suggests that July 2013 TIV is exceptionally strong at a sequential growth of 28%, versus average pre-Raya month sales growth of 5% in the past 5 years (See Table 3). This underpins our view that the strength in industry sales was driven by pent-up demand following consumers holding back purchases in early 2Q13. Judging by the strong bounce in July sales, on top of possibly sustained strength after August 2013 (weakness from ~1 week plant shutdown), we expect auto sector earnings to return strongly from new volume model launches. YTD TIV beats our estimates for the 1st time this year: Our estimated year-to-date (July) TIV of 380,313 units, if annualised (at 651,965 units) would for the first time, exceed our current forecast of 637,000 units for 2013. We see potential upside to our forecast later in the year. We understand there was ~1 week plant shutdown for the Raya festivities, suggesting a slight slowdown in August sales.

- Festive sales discounting started in early July: While we are cautious on the potential impact on margins from the prefestivities discounting, we bear in mind that this has been discounted and is part of industry measures since late 2012 to offer more affordable cars. While this is an ongoing process, higher localisation, increasingly cheaper parts, and potential tax incentives from the upcoming NAP should buffer the impact on margins in the mid-term. Recall that despite a 10%-11% effective decline in pricing for Perodua (as an example) in 1Q13, margins actually expanded given a larger 12% savings in input cost (mainly cheaper parts from vendors for Perodua).

- Weaker MYR is a developing risk: The sector has enjoyed good earnings following the strengthening of the MYR over the past four quarters. While the impact of this may only be seen in 4Q13, there is risk of FY14F downward earnings adjustment should the MYR weakness persist (our current projections factor in JPY:MYR at 3.4-3.5 and USD:MYR at RM3.15 over FY13-14F). TCM is most sensitive to forex – every 1% change in USD impacts earnings by 4%-5% while every 1% change in JPY impacts earnings by 1.5%-2%. MBM has little exposure to USD as the Perodua and Hino’s import are in JPY. Every 1% change in JPY:MYR impacts earnings by 2%. YTD, USD:MYR has averaged at RM3.23 while JPY:MYR at 3.33.

- Watch out for upcoming NAP: Two key catalysts that we expect in the upcoming NAP are:- (1) Tax incentives, which will lower duty costs for manufacturers, particularly non-nationals (currently accounts for c.35% of total cost); (2) Incremental export volumes which will gradually act as a natural hedge and reduce earnings volatility from forex movements. Every 1% increase in (overall) unit sales volume impacts earnings by c.3%, on our estimates.

- Maintain bottom-up driven OVERWEIGHT on autos: The record July TIV underpins our view of a pent-up and demand driven recovery after the weakness in April-May 2013 following uncertainties in the direction of car prices. TCM (BUY, FV: RM7.50/share) remains our top sector 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. MBM (BUY, FV: RM4.60/share) meanwhile, provides best exposure to Perodua as the latter accounts for >60% of MBM’s earnings (vs. 15% for UMW) and valuations are way more attractive at FY13F PE of 9x (vs UMW: 16x). Another 15% price reduction from vendors is expected in FY14F, which should buffer price discounting and currency weakness.

Source: AmeSecurities