KUALA LUMPUR (April 24): Malaysian automotive companies may see earnings decline this year as sales dip and operating costs rise amid the emergence of several Chinese brands offering attractive pricing, analysts cautioned.

Vehicle sales may fall below the Malaysian Automotive Association’s estimate of 740,000 units this year, research houses including UOB Kay Hian, Hong Leong Investment Bank (HLIB) and Kenanga Investment Bank warned as they kept the sector on “neutral”.

“We maintain our conservative view on the sector, given the sector’s limited catalysts,” said UOB Kay Hian which is projecting sales of 660,000 units.

Consumer sentiment may be hit by lingering concerns over fuel subsidy rationalisation, the increase in sales tax and the impending luxury tax, the house said.

For HLIB, which expects total industry volume of 720,000 units this year, sales are expected to slow due to softening order backlogs while aggressive promotions by Chinese carmakers intensify competition for existing marques.

Kenanga, meanwhile, is forecasting sales of 710,000 units and noted that fuel subsidy rationalisation could dampen demand for mid-market car models as the middle 40% household income group may delay purchasing new vehicles or opt for smaller cars to reduce fuel expenses.

The comments follow the latest data showing a near 10% year-on-year decline in vehicle sales in March.

At 71,052 units, the total industry volume was 10.5% higher when compared to February, thanks to a delivery rush by companies with financial years ending on March 31 and Hari Raya campaigns.

To reduce its fiscal deficit, the government plans to remove the RON95 fuel subsidy, which contributed significantly to the previous year's RM81 billion subsidy expenditure.

Even with subsidy rationalisation challenges, Kenanga and HLIB see a possibility of growth from 2024's new model launches, with proactive sales and marketing efforts expected to maintain manufacturer sales.

Top picks are MBM Resources Bhd and DRB-Hicom Bhd for their strong leverage of national brands like Proton and Perodua, benefiting from more stable sales volumes and potential long-term growth through exports.

Shares in MBM Resources hit a record high of RM4.95 earlier this month and have gained 16% so far this year, valuing the company at RM1.90 billion. DRB-Hicom is valued at RM2.65 billion after a 1.43% year-to-date loss.

There are four “buy”, six “hold” and one “sell” calls on MBM Resources, with a 12-month target price (TP) of RM4.60, according to Bloomberg, and two “buy” and two “hold” ratings for DRB-Hicom with a 12-month TP of RM1.70.