- The auto industry delivered strong sales in March, rising by 14% YoY and a whopping +34% MoM, to register at 67,310 units. The strong sales were to a certain extent inflated by consumers buying ahead of the GST implementation given uncertainties in car price movement post-GST, back then.

- Eventually however, major carmakers reduced pricing (for CKD models mainly) by between 0.1% and 6%. While the lowering in car price is a positive for demand, April TIV could weaken MoM given the normalisation of the pre-GST buying rush and as consumers adjust to the impact of GST on the cost of living.

- Having said that, 1Q15 TIV was impressive (in relative to consensus expectation of a YoY contraction) and underpins our view of pent-up demand returning to the market after an exceptionally weak year in 2014. 1Q15 TIV of 168,302 (+5% YTD), if annualised, is still 2% below our estimate of 690K, but has to be taken into context with the seasonal February weakness being a short working month.

- Mazda was again one of the strongest performers among the non-nationals, registering a 64% YoY growth while Honda grew by some 95% YoY. Both players are notably some of the earliest beneficiaries of the Energy Efficient Vehicle program launched in the 2014 NAP. Honda has now overtaken Toyota as the largest nonnational with a 13% market share.

- National cars maintained their lead in market share in March, in line with our thesis of national cars making a comeback this year. Perodua registered a 38% YoY increase in TIV (+21% MoM) reflecting the strong demand for the Axia (which we estimate to have a four to five months order backlog) and gradual increase in Axia production. Perodua’s 1Q15 TIV of 57,153 units, if annualised (i.e. at 228,612) would have been 10% ahead of our FY15F of 207,772 units.

- We expect industry discounting to have been largely rolled back post 1Q15 given the significant impact the stronger USD would have on the major players’ margins. 4Q14 already saw sector pretax margins contract (See Exhibit 2) despite positive TIV growth during the period, while 1Q15 earnings will be more reflective of the uptrend in USD.

- We maintain NEUTRAL on the auto sector. While we reaffirm our contrarian positive view on TIV growth (i.e. +3.6% YoY in 2015), we are in-line with consensus on expectations of poor earnings given currency volatilities, which will impact margins negatively for key players.

- We have shifted preference to MBM (BUY, fair value: RM3.80/share) as our top sector pick given the more meaningful upside, undemanding valuations and potential outperformance of Perodua TIV.

Source: AmeSecurities Research - 23 Apr 2015