- We reaffirm our NEUTRAL rating on the auto sector. September 2014 TIV weakness underpins our recent downgrade of the sector.

- September TIV fell by some 13% YoY and 7% MoM from an already weak base in August. This is the first time monthly TIV has fallen below the 50,000 units mark in the past 15 months.

- Passenger car TIV registered the third consecutive month of contraction, falling by a sharp 15% YoY (-8% MoM) in September. Commercial vehicle TIV also dropped by 2% YoY (+2% MoM). MAA attributes the fall to the wait-and-see attitude of consumers, ahead of the launch of two new major models namely the Perodua Axia (A-segment) and Proton Iriz (B-segment).

- While we agree that this is a typical consumer reaction, we think more stringent financing, sharply higher hire purchase rates, and weakness in underlying demand is another factor contributing to TIV weakness.

- On YTD basis, TIV is marginally up by 0.9%, but this is largely driven by strength in the early part of the year. Annualised TIV of 656,406 is still short of our forecast of 680,090, but we think heavy year-end discounting and new models introductions could artificially drive volumes in 4Q14.

- September TIV underpins 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) Kkock-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 rationalization 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 two quarters, at least.

- BAuto (BUY, FV: RM3.70/share) remains our top sector pick given:- (1) its focus on higher passenger car 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. 

Source: AmeSecurities