- We do not expect much of a drastic impact on sales volumes as a result of the reported 40bps hike in hire purchase rates i.e. national cars from 2.7% to 3.1% and non-national cars from 2.4% to 2.8% - as reported in one of the local dailies this morning.

- For the purchase of a car priced at RM50,000 as an example, the 4bps change in rates increases monthly payment by RM16.70/month to RM592/month (See Table 1). This would have little impact on affordability of a car i.e. a 0.7% reduction in affordability for a person with gross income of RM3,000, for instance (this would be the mid-range income of a typical buyer of national cars).

- The loan assessment tightening measures in 2012 had a more serious predicament on sector volumes – the basis of loan assessment was changed from gross income to net income i.e. excluding taxes, EPF and SOCSO contributions.

- This took out approximately 15%-20% of a car buyer’s affordability, which is a lot more significant compared to minor hikes in interest rates as explained above i.e. a 0.7% impact on affordability from a 40bps hike (See Table 2).

- Even then, the 2012 measures were quickly addressed by players by shifting focus on different segments i.e. Perodua started focusing on the MyVi and reduced focus on the Viva, its lowest model that was impacted by the tighter loan assessment. As a result, 2012 TIV grew by 4.6%, though this has to be taken in context with the supply issues arising from the Thai floods and Japan earthquake in 2011.

- Below (See Chart 1) is a chart showing historical rates vs. TIV trends. Note that there was weakness in 2006 TIV due to policy uncertainties i.e. the market was expecting a sharp drop in import duties to comply with AFTA under the NAP.

- Announcement of the new policy only came in late 2006 and as such, there was a standstill in purchases during that year. Import duties were eventually lowered, only to be offset by a significant increase in excise duties. Interest rate hikes and reductions thereafter seem to have had little impact on volume trends.

- What will have a heavy weighting on auto sector dynamics in the near-to-mid term are policy changes that are bringing about a structural change in landscape i.e. new capacity for exports and domestic markets, EEV incentives that can significantly lower a manufacturer’s cost structure, price discounting, cheaper variants/models and new model introductions.

Source: AmeSecurities