- Perodua’s sales in 1H14 fell 2.4% to 94,500 vs. 96,900 in 1H13. The fall in Perodua sales is not entirely new as Perodua’s sales in Jan, April and May 2014 already registered a fall of between 1% and 23% YoY. MAA’s official TIV numbers up to May 2014 already shows a 4% YTD fall in Perodua volumes.

- However, Perodua has this time around revised down its 2014 sales target to 193,000 units from 197,000 units earlier, given intense competition and a tightening of financing guidelines. Perodua’s official forecast is now closer to our forecast of 192,198 units for 2014. Nonetheless, Perodua’s June TIV, which will be announced within the next few days, is likely to show a YoY increase of 6.7% YoY to 16,834 units.

- The segment that was impacted the most in 1H14 is the A segment, represented by the Viva. Perodua has started discounting the model by up to RM5,300 since mid-June. This is roughly an 11%-15% discount vs. the original price.

- The strategy to significantly discount the Viva is two-pronged: (1) This is actually a run-out process for the Viva, which will be replaced by a new A-segment model codenamed the D87A in September. Viva production will then be discontinued. (2) The new level of pricing for the Viva is likely closer to match the D87A, which will be more cost competitive given that it is EEV qualified and hence, will benefit from certain EEV incentives.

- While we do not rule out slight margin erosion, our chat with management suggests that the c.RM5k discount is actually buffered by the weaker JPY, and the margin risk only lasts until the Viva is discontinued in 3Q14-4Q14.

- Perodua’s net profit in the 1Q14 actually rose by 11% YoY, with a 6% rise in invoices; for accounting profit derivation purposes, Perodua recognises invoicing, whereas MAA numbers are lagged as it recognises final registration. As a comparison, MAA’s 1Q14 TIV shows that Perodua sales fell by 5.7%.

- Our bottom-up driven OVERWEIGHT call on the sector and BUY call on MBM however, is now placed under review given potential stock specific risks. For the sector broadly, there is developing risk of demand moderation given recent macro policy developments and uncertainties on disposable income created by the GST.

- That said, our key BUY calls are driven by stock-specific factors. BAuto remains our top sector pick (BUY, FV: RM3.10/share). The group’s earnings are focused on the higher segments i.e. C segment and above – meaning it will not be as badly impacted as players that rely heavily on the “income sensitive” A and B segments. Aggressive new model introductions and potential acquisitive growth are key near-term catalysts for BAuto. 

Source: AmeSecurities