- May 2015 TIV rebounded 13% MoM to 51,254 units after having fallen 33% in April. This reflects the maiden impact of the GST implementation and a vacuum created by pre-GST purchases which brought sales forward. On a YoY basis, TIV contraction narrowed to 8% versus -23% YoY seen in April. YTD, TIV has reached 264,743 units (-3% YTD), which accounts for just 92% of our 2015 forecast of 690,724 units, if annualised, though this has to be taken in context with an exceptionally weak 2Q15. That said, the shortfall against our numbers so far comes from Proton and Toyota. Perodua is outperforming, while the rest are in-line.

- The rebound in TIV was led by Proton (+67% MoM), but it is a reflection of sales normalisation, having been the worst hit (-53% MoM) in April. Mazda TIV recovered to >1K units in May, and was the next strongest performer (+64% MoM). TIV should continue to improve in 2H15 as consumers gradually adjust to the impact of GST on the cost of living. In the nearterm, sales could be propped up by the pre-Raya buying rush and festive promotions by industry players.

- Production-to-sales ratio is now in excess of 100% vs. a typical 90%-95% historically, mainly due to excess production in April caused by the sharp drop in TIV, which is gradually recovering. Reflecting a reaction, TIP slowed down in May, though production-to-sales in May is still close to 100%. Our channel checks suggest that discounting activities are popping up at some of the small-to-mid sized non-nationals (those which also have significant exposure to USD imports apparently), in particular in the B-segment. At this point, it could be attributed to pre-Raya promotions and minor inventory clearance, but if it sustains beyond August, it could be a cause for concern. Considering the weak MYR which is already inflating import cost, any discounting is likely to be driven by needs to liquidate excess inventories rather than for market share gains.

- The persistently weak MYR (against the USD) is a huge risk to our forecast, which currently factors in USD:MYR of 3.45 over FY15F-16F. YTD, the USD averaged at 3.63, while latest spot rates have actually trended up to 3.7 to 3.8 levels. Every 1% change in our USD assumption impacts UMW’s FY15F earnings by 2.6% and TCM by 4%. Perodua and BAuto have minimal exposure to the USD as their import costs are JPY-oriented.

- We remain NEUTRAL on autos given concerns on forex volatility mainly. While sector yields look increasingly attractive, there is downside risk (for Tan Chong and UMW) given a deteriorating earnings outlook. Our top BUY picks are MBM (BUY, FV: RM3.80/share) and Berjaya Auto (BUY, FV: RM3.30/share - post bonus issue). We like MBM for : (1) a strong recovery of Perodua TIV and margins riding on relatively weak JPY-MYR levels; (2) a cheap proxy into Perodua’s earnings at implied valuation of just 9x FY15F earnings; and (3) normalising capex coupled with earnings turnaround which can drive a gap-up in dividend payout.

- We also like BAuto for: (1) A solid 30% FY16F EPS growth riding on aggressive new model launches; (2) upside potential to our 4% yield (FY16F) backed by 5%-6% FCF yield over FY16F-17F and absence of significant capex; and (3) it is positioned for acquisitive growth given a solid RM320mil net cash. UMW (FV: RM10.70/share) and Tan Chong (FV: RM3.40/share) remain HOLDs as earnings are likely to remain depressed given significant operational exposure to the USD. Tan Chong is trading deeply below its book value now (FY15F: 0.66x PBV at current share price), but the stock lacks earnings catalyst in the near term.

Source: AmeSecurities Research - 26 Jun 2015