Highlights & Comments

As the government cut subsidies and implement GST, consumers are burdened with increasing cost of living, affecting their affordability on car ownership. Given the right pricing, we believe Malaysian will still opt to own cars due to convenience and poor public transport infrastructure.

Hence, the trend moving forward will focus on cheaper and smaller car, known as “Down-Trading”, which national cars i.e. Proton (DRB) and Perodua (UMW & MBMR) dominates.

The upcoming NAP (to be announced by mid Jan 2014) will focus on restructuring the whole automotive ecosystem, supporting the EEV policy (Efficient Energy Vehicle), which is to position Malaysia as the regional EEV manufacturing hub.

Government is likely to give various incentives and supports to existing and new OEMs that bring EEV technology into the country. Major OEMs are strategizing in line with the policy. Local autoparts and components manufacturer i.e. DRB and MBMR will benefits from the higher localization rate and increasing vehicle manufacturing volume.

Government unlikely to implement ELV (End Life Vehicle) Policy, but may regulate compulsory annual car checks for old cars, to determine their road-worthiness. National cars i.e. Proton (DRB) and Perodua (UMW & MBMR) may benefit from the policy, as majority of the poorly maintained old car owners are from lower income group.

We expect margin depression due to stiff competitions among the OEMs especially the foreign marques. The depreciation of RM will further affect these OEMs which import raw materials, CKDs packs and CBUs in US$.

Risks

• Slowdown in the Malaysian economy.
• Announcement of immediate drastic cut in car prices.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.

Forecasts

Adjusted lower earnings for DRB, MBMR, UMW and TCM, after accounting for higher operational cost, stiff competition and RM depreciation.

Rating

Neutral

Positives –

• Potential export to regional market, i.e. Malaysia as a hub;
• Implementation of Energy Efficient Policy;
• Implementation of Annual Car Check Policy.

Negatives –

• Tightening of bank lending rules and rise in inflation;
• Instability of global automotive supply chain;
• Depreciation of RM.

Valuation

Maintained Overweight outlook on Automotive Sector with Top Picks: DRB (RM3.38) and MBM Resources (RM4.52).

Source: Hong Leong Investment Bank Research- 6 Jan 2014