Highlights

• 2016 TIV is expected to record 572k units, a drop of 14.2% yoy. The decline in TIV was due to deterioration in consumer sentiments, weakened further by price hikes by several OEMs. Nevertheless, OEMs reverted to aggressive sales and marketing campaigns (especially towards year end) to achieve sales target, given its initial strategy of price hikes had backfired on lower consumer demand.

• Despite the ongoing market impediments, we expect 2017 TIV to recover to 600.6k units (+5.0% yoy). Both national OEMs Perodua and Proton are likely to gain market share on the back of models launched in 2H16 and 2017.

• Consumer confidence index had reverted lower to 73.6 points in 3Q16 after 2 consecutive quarters of recovery. Hence, we expect only mild recovery in consumer confidence into 2017, as consumers adapt to the ongoing market impediments.

• The ongoing tight banks’ lending practices will continue to affect hire purchase approvals (especially car buyers in the lower income group) in 2017. Nevertheless, we recognize banks priority in targeting asset (loan) base growth in 2017 to drive earnings growth after a distressed year of 2016.

• Weakened RM against other major currencies (especially on US$ and JP¥ ) had severely increased OEMs’ input cost structure and affected their margins over the past 2 years. Mirroring the 2016 situation, we believe any price hike attempt by the OEMs may still backfire and OEMs will eventually resort to aggressive sales marketing strategy in 2017 to boost sales volume (lower overall fix costs), especially on domestic and CKD models production.

Risks

• Loosen up of banks’ HP rules.

• Improved Malaysian economy and consumer sentiment.

• Appreciation of RM.

• Lower fuel prices and interest rate.

Forecasts

• We maintain DRB earnings forecast, but cut MBM, UMW and TCM earnings for FY16-18 on the account of low car sales volume and margins deterioration.

Rating

Underweight ( ↔ )

• Entering 2017, the sector is expected to continue being undermined by the ongoing weak consumer sentiments as well as weakening of RM, which has impacted on cost structure and margins. The tightened bank lending requirements will also continue to affect sales volume. Nevertheless, we expect national OEMs to sustain sales volume in 2017.

Valuation

• Despite an expected recovery in TIV, Underweight on Automotive sector is maintained, given the lackluster outlook in 2017 – subdued consumer sentiment and margin erosion due to low sales volume, higher input cost (due to weakened RM) and higher spending on sales and marketing expenses. Our top pick is DRB on expected improvement in Proton sales volume (new models launches) and ongoing restructuring of Proton with the emergence of strategic foreign OEM partnership (supported by government).

Source: Hong Leong Investment Bank Research - 11 Jan 2017