Highlights & Comments

Perodua Axia (UMW & MBM) and Proton Iriz (DRB)  were launched  with  strong  preliminary  bookings  of  13,500 (latest bookings  was  32,000)  and  17,000  respectively. Axia (RM26- 42k) is positioned  with high  fuel efficiency, while Iriz (RM42- 63k)  with  high  safely  features.  We  expect  strong sales of these  cars ,  driving  TIV in 4Q14 and 2015.

Cum  GST implementation  (1st April  2015),  there  could  be reduction in car prices (ranging  0-3%  dependent on car model),  but  consumers  may  be  affected  by  higher  cost  of livings.   Hence,  the  pricing  of  cars  (affordability:  downpayments and monthly repayments)  will be an important determinant  of  consumer  choice s.  We  believe  both Perodua Axia and Proton Iriz are best positioned  within the sweet spot of the market.

We  expect  OEMs  (e specially  foreign  players)  to  remain aggressive and competitive  in 4Q14 and 2015, which may continue to affect their margins .

Based on historical fuel hike measures in 2010 and 2013, there  were  no  material  impact  on  TIV.  Moreover,  higher BR1M payout  will  ease the burden of consumer (es pecially low income group). Hence, we  expect TIV to grow in 2014 -2015, driven by  smaller, value and more efficient car  e.g. Perodua Axia and Proton Iriz.

The recent +25bps  hike  in  OPR  is  not  expected  to  have material  impact on TIV . Note that  TIV continued to grow despite  OPR  hike s  in  2010 -2011  a s  well  as implementation of Responsible Lending guideline since early-2012.  Nevertheless,  we  do  not  expect  OPR  hike  in the near  term.

Down- Trading  trend  remained  intact,  driven  by affordability,  practicality  and  tighter  bank  guideline. Best  play on A-B segment cars.

Recent  movement  of  RM  (weakened  against  US$; strengthened against  JP¥, EU€ and  UK£) will be  beneficial to MBM and DRB,  neutral to UMW and negative to TCM.

Risks

• Prolonged  tightening of banks’ HP rules.
• Slowdown  in the Malaysian economy.
• Global automotive  supply chain disruption.
• Sudden  jump in fuel  prices and interest rate.

Forecasts

• Unchanged

Rating

Neutral

Positives  :–

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

Negatives  :–

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

Valuation

• Maintained  Neutral  with  Top  Picks:  MBM  Resources  (TP: RM4.00)  and  DRB (TP:  RM3.00).

Source: Hong Leong Investment Bank Research - 15 Oct 2014