- February TIV rose 12.6% YoY and was up by 1% MoM (despite a shorter working month vs. January), registering at 50,718 units. YTD, TIV reached 100,991 units, up 1% compared to the same period last year. The growth was mainly driven by 4%-7% YoY increases in national makes’ volumes and in the non-national segment; Toyota (+57% YoY) and Honda (+42%) were the strongest performers. The rise in TIV was to a certain extent, driven by a recovery from hiccups related to JPJ’s new registration system experienced in the past three months.

- Honda sales saw a strong uplift since mid-2013 from the launch of the CKD Jazz and Jazz hybrid, priced competitively at RM74,814-RM89,912. The Jazz CKD was launched in July 2013 and the hybrid in Dec 2012. The momentum from the petrol variant in particular, is still being sustained. Toyota is recovering from a weak 2013 (which saw its TIV fall by 13% against industry growth of 4.5%). The new Vios launched in 4Q13 in particular, is providing a good push for this recovery.

- While YTD volume, if annualised, stands at 605,946 units against our forecast of 679,205 (+3.6%) and MAA’s forecast of 670,000 (+2.2%), bear in mind that the 1st two months of the year are usually weak due to festive plant closures and post year-end discounting. Rising inflation and the weaker Ringgit against USD (YTD average of 3.3 vs. 2013 average of 3.15) are key risks to our call. However, our top picks i.e. BAuto and MBM are mainly exposed to the JPY, which has been more flattish (YTD average of 3.2 vs. 2013 average of 3.19).

- BAuto is a play on margin expansion on the back of its transformation to a CKD business model and exposure to high growth export markets, rather than outright domestic volume growth, while MBM is deeply undervalued (implied value of its Perodua stake at just 8x FY14F earnings). APM does not have much net exposure to forex as volatilities in forex are passed on to customers. A huge cash hoard suggests potential acquisitive growth and APM is also a beneficiary of the opening up of auto manufacturing in Malaysia as well as Indonesia’s LCGC program.

- Our BUY picks in the sector also benefit from cost reduction measures via:- (1) a 30% vendor cost reduction for Perodua over 2012-2013; (2) an estimated 25% reduction in duty costs for BAuto from its transformation to a CKD business model and EEV incentives; and (3) APM pulling out of certain Perodua development programs to avoid margin pressure from the latter’s cost down effort.

- Our recent downgrades on TCM and UMW were due to:- (1) a stronger USD; both players have significant exposure to USD imports i.e. 70%-100% of imports; (2) unfavourable positioning in the near term (post-EEV program launch) as the immediate EEV-qualified players, i.e. Honda and Mazda, stand to gain market share via improved pricing ability; and (3) potential margin pressure if non-EEV players react by reducing pricing without sufficient cost reduction measures in place.

- Our channel checks suggests that 2014 could see one of the highest number of new launches in recent years, with >50 new models (including facelifts) planned for launch including key models such as Proton GSC, new Perodua Viva, Mazda 3, the new Honda City and the Kia Optima facelift. 

Source: AmeSecurities