Highlights/ Comment

• For the past months, forex market has been working against RM, despite sound fundamentals of the country. YTD, RM has depreciated against major currency US$ by 19.9% (vs. 25.0% since early 2014) and JP¥ by 19.4%.

• The imported contents (raw materials), CKD packs (parts, components and modules) and CBU units are denominated mainly in US$ and JP¥. Consequently, the imported input cost has risen by circa 20% due to weakened RM.

• Some OEMs have announced price hikes in order to pass-through part of the higher input cost to end-buyers: 1. UMWT (UMW) announced price hikes of 4-16% for Toyota and Lexus cars (depending on import contents) effective 1 Jan 2016. 2. Perodua (UMW & MBM) announced price hikes of RM990 (about 3%) for Axia G effective 1 Oct 2015.

• BMW is also mulling price hikes by 2016, if the current weakened situation continues, while Mercedes will only review current situation by 2016.

• Conversely, DRB announced no plans to increase price of cars under its stable at this juncture. The marques include Proton, Honda, Mitsubishi, Isuzu, Suzuki, Jeep and Tata.

• Despite the positive measure to increase car prices, we believe the current stiff competitions within the industry may defeat such move as OEMs continue to offer various incentive and promotional packages (discounts, rebates, freebies etc). The industry faces declining sales volume (demand) on the back of weakened consumer sentiments. OEMs will have to balance sales volume and prices.

• Hence, we expect automotive industry to remain challenging on the back of: 1) volume decline (except for valued small size cars such as Perodua); 2) high input costs; and 3) high operational and marketing cost. -

Risks

• 1) Prolonged tightening of banks’ HP rules; 2) Slowdown in the Malaysian economy; 3) Global automotive supply chain disruption; 4) Sudden jump in fuel prices and interest rate; and 5) Depreciation of RM.

Rating

• Underweight

Positives

• 1) Potential export to regional market, i.e. Malaysia as a hub; 2) Implementation of Energy Efficient Policy; and 3) Implementation of Annual Car Check Policy.

Negatives

• 1) Weakened consumer sentiments; 2) Tightening of bank lending rules; 3) GST Implementation; and 4) Depreciation of RM.

Valuation

• Maintained Underweight on Automotive industry outlook. Our top pick is MBM (BUY; TP: RM3.45) leveraging on sustainable demand for Perodua.

Source: Hong Leong Investment Bank Research - 7 Oct 2015