• We project Total Industry Volume (TIV) to revert back to historical average as backlog orders following SST exemption in 2023 are expected to be fully fulfilled by 1Q2024.

• We anticipate the increase in Sales and Services Tax (SST), impending luxury tax, higher interest rates and normalization in petrol price (in 2H24) may potentially dampen consumer sentiment on big ticket item.

• Maintain a NEUTRAL recommendation on the sector given industry specific challenges and headwinds. However, we still have a BUY recommendation on BAuto (TP: RM2.80) and HOLD for UMW (TP: RM5.00) and MBMR (TP: RM4.28).

2023 Performance Remains Positive. The automotive industry's 2023 performance remained resilient, driven by a 10.6% YoY increase in Total Industry Volume (TIV) to 640k units as of 10M23, fueled by the ongoing backlog order fulfillment for SST exemption until March 2023. October's TIV, the second-highest in 2023 at 74,896 units, showed a 10% MoM rise due to aggressive promotions and improved auto-parts supply, notably for Perodua. The Perodua's monthly production capacity reached 35k units, totaling 234k YTD, marking a 19.4% YoY increase. Sales success is credited to new models like the Perodua Alza and Axia, alongside strong performance from Bezza, MyVi, and Ativa. As for Proton, its 9M23 sales reached 116k units, up 14.1% YoY, led by Saga, X50, and Persona, comprising 81.4% of total sales. The robust performance is underpinned by positive SST exemption impact, driving consumer demand and industry growth.

Uncertainties Still Clouding the Sector. Given that the TIV has reached 720k units in 2022 which is the second highest on record (anticipated to surpass with an estimate of 750k units in 2023 by MAA), we expect TIV figures to stabilize going forward. Budget 2024 announcement of SST increase to 8%, imposition of luxury tax, higher car loan interest rates and normalization in petrol price may affect consumer sentiment and deter bigticket purchases. Our projection aligns with MAA's estimate of 650k TIV for 2024, anticipating the fulfillment of nearly 200k backlog orders by 1Q2024. The geopolitical risks related to the Russia-Ukraine and Palestinian-Israeli war, along with the rivalry between the US and China, are expected to have an impact on global economic growth and inflation pressure. Nevertheless, TIV outlook for 2024 may be influenced by labor market advancements (labor force participation rate: 70%) and the introduction of new models and facelifts. Notably, SUVs are gaining traction in Malaysia, with sales soaring by +40% in 2021 and 2022, driven by aesthetics, enhanced driving experience, interior design, advanced engine tech, and a raised driving position. SUVs are anticipated to be sought-after models next year. As such, despite prevailing uncertainties, we believe TIV normalization could result in 2024 post SST exemption in 2023.

Budget 2024 Boosts EV Infrastructure. Budget 2024 emphasizes Electric Vehicles (EVs), offering an RM2,500 tax exemption for EV charging ports and attracting over RM170mn investments from key players like TNB, Gentari, and Tesla Malaysia for 180 EV charging stations. Recognizing the crucial role of EV charging infrastructure, the government has set a target of 10,000 EV charging stations by 2025. As of October 2023, there were 1,434 charging ports (1,117 AC units, 317 DC units), and TNB Electron Charging Points have achieved 40-50% completion at 7 R&R locations on the PLUS highway. Plan-Malaysia introduces Planning Guidelines for EV Charging Bays (GPP EVCB) to expedite development, highlighting the significance of investing in charging infrastructure for EV success and growth in Malaysia.

Source: BIMB Securities Research - 17 Jan 2024