-  The 2Q result season was a decent one for the auto sector, with all companies under coverage broadly meeting our and consensus expectations. However, there were downgrades in estimates of 1%-6% as consensus factored in a weaker MYR. We have been conservative with our USD:MYR estimate at RM3.15 per USD and for now, leave our numbers unchanged.

-  The earnings season was mixed for the sector despite a 1.2% QoQ TIV contraction. MBM’s 2Q13 was up 13% QoQ, TCM down 20% QoQ and UMW was up 14% QoQ (mainly due to O&G). Despite a 17% QoQ rise in Toyota TIV, UMW auto’s earnings fell 3% QoQ, partly due to heavy discounting to clear off the remaining stock of the current generation Vios. Indications are that the impact of heavy discounting in 1Q13 had normalised. MBM’s auto trading was up 10% QoQ (pre-tax margin up 1bp to 0.7%).

-  Auto parts players recover: Auto part players seem to have recovered from the impact of price reductions, with QoQ earnings up 26% and 10% for APM’s and MBM’s part manufacturing divisions, respectively. This was driven mainly by improved production from Proton (+7% QoQ) and Perodua (+14%). APM’s 2Q13 saw the inclusion of new customers for its module supplies, i.e. Mazda CX5 CKD and Subaru XV. However, we are wary of further price cuts as Perodua is targeting another 15% cost reduction by end-2013.

-  Despite weak TIV in 2Q13, indications are that bookings have returned strongly. In its results briefing, TCM highlighted that since June, it has seen bookings exceed 6K/month. As at end July, bookings remained at >7K units, we gather. Perodua also indicated that it hit record high bookings of 27,600 units in July. New launches in 3Q13 will be a key driver for 4Q13 earnings, after anexpected strong volume recovery in 3Q13. TCM is launching the all new Grand Livina (estimated volumes of 900-1,000/month) on 24 Sept, while the new Vios (estimated 2,500-2,700/month unit sales) will be launched next month.

-  Dividends galore!: The Tan Chong group of companies, i.e. APM and TCM were particularly generous with dividends in 2Q13. APM announced a special dividend of 30 sen/share (on top of an interim of 10 sen/share), while TCM announced a special dividend of 9 sen/share (and an interim dividend of 6 sen/share). Assuming a similar final dividend as last year’s, the total dividend yield for APM (62 sen/share) would be attractive at 11% (FY13F) and 3.4% for TCM. It is possible APM may pay out another round of special dividend in 2H13 – we estimate it still has RM20mil of S108 tax credits expiring by end-FY13, which enables an up to RM80mil payout of tax free dividends. In such an optimistic scenario, APM’s FY13 dividend yield will rise to 16% (92 sen/share).

-  Currency headwinds, how much has been priced in?: An every 1% change in USD impacts TCM’s FY14F earnings by c.5% and UMW by 2.5%. Assuming USD:MYR averages at MYR3.21 in FY14F (2% weaker versus our base case of MYR3.15 and 2.9% weaker vs. YTD rate average of MYR3.12/USD), we estimate TCM’s FY14F earnings to fall by 9.6% and UMW by 5% (See Table 2). This can be compared to the 13% and 14% share price retracement seen for TCM and UMW, respectively, over the past month, which already implies an MYR depreciation of 3%-6% vs. our base case and 4%-7% vs. FY13 YTD average.

-  No change to our OVERWEIGHT call on autos: TCM remains our top sector pick for:- (1) Aggressive model launches to plug in the gap in the current model line-up; (2) Potential beneficiary of Malaysia’s EEV drive.

Source: AmeSecurities