- August BNM statistics indicated that auto loan approval rates recovered to well above 51% (historical 3-year average) (See Chart 1), but this has to be taken into context with the four consecutive months of contraction in auto loan applications in the first place (See Chart 2).

- Our recent visits to various dealers (both new and used car dealers) as well as informal meetings with hire purchase loan officers from various banks over the past week suggest that hire purchase rates being offered in the market have steadily risen from a base 2.5%-2.8% range (for a new non-national model) seen in the past 12 months to a base of 3.2%-3.3% range now, as an example.

- The increase of 50-70bps in market hire purchase rates clearly outpaces the recent OPR hike of 25bps. While there is no uniformed rate increase across the board, banks that have fallen behind in raising rates is apparently gradually catching up, based on our finding.

- Separately, we would expect the upcoming September TIV to somewhat reflect weaker numbers on a YoY basis, and possibly on a MoM basis as well, despite a shorter working month in August, given recent developments. Our recent dealer visits also suggest there has been a marked slowdown in turnover in the used car market, though this varies based on the price points of cars being sold.

- This should underpin our recent downgrade of the sector, which is premised on several key factors: (1) deterioration in loan applications which could be a reflection of outright deterioration in auto demand, or banks rolling back auto financing; (2) knock-on effect of tighter financing on trade-in values/2nd hand market will gradually catch on to the new car market; and (3) developing demand risk form GST and subsidy rationalisation-driven inflation.

- We would expect a certain extent of sales volume strength in 4Q14 given launches of A/B segment models by the national cars, but sustainability of the initial hype is questionable given the deteriorating industry backdrop, while converting bookings into actual sales could become more challenging, particularly at the lower end of the market segment. Margin erosion to counter the abovementioned factors should remain at the centre stage of earnings over the next 2 quarters, at least.

- BAuto (BUY, FV: RM3.70/share) remains our top sector pick given:- (1) its niche in higher segments; (2) cost competitiveness from EEV tax incentives and increased localization; (3) aggressive new model introductions; (4) best play into the weak JPY in our universe of auto stocks (3% impact to FY15F earnings per 1% change in JPY); and (5) potential acquisitive growth or expansion into new markets backed by a strong balance sheet (net cash of RM195mil, or ~10% of market cap).

Source: AmeSecurities