Highlights & Comments

• YTD (July), TIV has been disappointing at 380.8k uni ts, a drop of 3.2% yoy. The on-going aggressive sales campaigns by the many OEMs have failed to boost sales growth mainly due to: 1) Weakened consumer sentiments; 2) Tighten banks’ lending guidelines; and 3) GST implementation.

• Consumers are facing deteriorating purchasing power, post GST implementation due to higher prices of goods and services. The weakened RM has further exacerbated the situation, as imported goods become more expensive.

• RM weakening also has direct negative impact on the automotive industry, due to imported contents (raw materials, CKD parts and CBUs) are denominated in foreign currencies (US$, EU€ and JP¥). Even OEMs with high localization rates are exposed to foreign exchange, given local suppliers are importing raw materials and components, before supplying to OEMs.

• The whole Automotive industry (with the exception of MBM) is facing deteriorating margins from: 1) Decline sales volume; 2) Lower sales price; 3) Higher input and operational costs; and 4) High rigid fixed cost structure.

• MBM has been reporting stronger margins due to high leverage on Perodua contributions. Expect sustainable earnings for 2H15 and 2016 from continuous strong Perodua sales and turnaround of Alloy Wheel plant.

• We have cut our expectation on 2015 TIV to 649.8k units, a drop of 2.5% yoy (from 663k units previously), with growth from A-B segments (major beneficiary Perodua) being offset by lower demand for mid-high 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.
• Depreciation of RM.

Forecasts

• Unchanged. We have al ready adjusted our earnings expectations for the respective companies on the recent quarterly result reports.

Rating

• Underweight

Positives

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

Negatives

• Weakened consumer sentiments;
• Tightening of bank lending rules;
• GST Implementation; and
• Depreciation of RM.

Valuation

• Downgrade to Underweight with Top Picks: MBM Resources (TP: RM3.45). Total market capital of Sell Ratings outweighs Buy Ratings.

Source: Hong Leong Investment Bank Research - 10 Sep 2015