Highlights

• 2015 TIV is expected to record 665-668k units, relatively flat vs 2014 of 666.5k units. The deterioration in consumer sentiment was being upheld by the on-going aggressive sales and marketing campaigns by the various OEMs, which had affected their margins.

• We expect 2016 to be another flat year for TIV (if not worse) at 665k units. Both national cars Perodua and Proton are likely to gain market share in 2016 on the back of new launches during the year.

• Consumer confidence index has deteriorated to record low 70.2 points in 3Q15 (worse than 2008 financial crisis level at 70.6 points), affected by higher cost of living and lower purchasing power. Likewise, demand for cars is likely to remain lackluster in 2016, supported mainly by aggressive sales and marketing campaigns (erodi ng OEMs’ margin) as well as new model launches by Perodua and Proton.

• The continued tight banks’ lending practices will continue to affect hire purchase approvals (especially car buyers in the lower income group) as banks exercise more discipline on risk-based pricing. Hence, 2016 will be another year of constraint in terms of financing.

• Weakened RM against other major currencies (i.e. US$ and JP¥) by 9-18% YTD had severely increased OEMs’ input cost structure and affected thei r margins. The full impact of weakened RM will only be seen in 2016. Several OEMs have decided to increase car prices by Jan 2016. That said, OEMs may eventually resort to usual aggressive sales and marketing campaigns, hence offsetting the benefits of price hikes.

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

• Underweight

Positives

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

Negatives

• Tightening of bank lending rules;
• Competitive pressure on margins; and
• Depreciation of RM.

Valuation

• Underweight on Automotive sector is maintained, given the lackluster outlook in 2016 – deterioration in consumer sentiment and margin erosion due to lower sales volume, higher input cost (due to weakened RM) and higher spending on sales and marketing expenses. Our top picks for the sector are DRB and MBM on the premise of distressed valuation.

Source: Hong Leong Investment Bank Research - 13 Jan 2016