Highlights & Comments

• Despite potential car price reduction of less than 3% cum GST implementation by 1st April 2015, TIV may still be affected by potential higher cost of livings (from GST) and lower purchasing power (affordability ). Hence, absolute pricing of cars (affordability) will be an important determinant of consumer choices .

• In the near term, banks’ new lending policy based on cost of funding and borrowers’ risk profile may affect loan approvals a s banks exercise more discipline on risk-ba sed pricing. However, we believe the impact to normalize in the longer term when market started to familiarize with the new policy (as witnessed by TIV growth despite implementation of Responsible Lending Guideline).

• Recent movement of RM (weakened against US$ and other major currencies, except for JP¥ ) is beneficial to MBM and DRB, given their inputs are mainly JP¥. However, UMW and TCM are negatively impacted from US$ denominated input costs .

• Down- Trading trend remained intact, driven by affordability, practicality and tighter bank guideline. Best play on A- B segment cars. Notably, Perodua’s succe ssful new launch Axia is the be st play within the segment (receive bookings of 62k units within 3 months).

• The recent drop in fuel pump price is not expected to have material influence on car demand, given the main determinant of car purc hases are consumers’ affordability and income certainty. Nevertheless, the price drop has led to consumers ’ feel good factor.

• Taking into consideration of all the above factors, we expect TIV to remain flat at 663k units in 2015, with growth from A- B segments being offset by lower demand for midhigh end segments.

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

• We have fine-tuned our earnings models – MBMR (- 0.8% – +0.4%), UMWH ( -6.8% – +0.4%), DRB ( -15.3% – -1.9%) and TCM (-39.9% – +0.1%).

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: RM2.82).

Source: Hong Leong Investment Bank Research - 12 Jan 2015