Highlights

• According to Paultan.org, the government has increased excise duty for affordable multi-purpose vehicles (MPV) by 5% (from current 60% to 65%), in accordance to “Excise Duties Order 2017” which replaces 2012 version.

• Affordable MPV has engine capacity of 1.5L cc and below. Within this segment, there are Perodua Alza (1.5L), Proton Ertiga (1.4L), Toyota Avanza (1.5L), Toyota Sienta (1.5L) and the newly launched Honda BR-V (1.5L).

• The new rate is effective on 1 April 2017.

Comment

• Based on our understanding, the previous excise duty for affordable MPV ranged from 60-75% (not all levied at 60%) and now that government wanted to standardize the rate to 65%. Hence, some models will benefit from the standardization (from 75% to 65%) and some models may lose out (from 60% to 65%). Nevertheless, we believe that most models were charged at the lower range of 60% and 65% excise duty.

• We opine that the standardization of excise duty rate is slightly negative to the automotive industry, given that affordable MPV contributed circa 13.7% to TIV on YTD basis.
   
• The increase in excise duty will lead to higher cost structure and subsequently OEM will attempt to pass back to consumers through higher pricing, which may affect their sales volume. We believe that foreign OEMs (i.e. Honda and Toyota) have stronger marketing ability to pass the higher cost to consumer as their targeted clientele has higher purchasing power and is less price sensitive.
   
• CBU models will have to take the full impact of 5% adjustment while CKD models will take lesser impact as CKD models enjoy certain rebates on excise duty due to local contents.
   

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.

Rating

Underweight ( )

• The sector is expected to continue being undermined by the ongoing subdued consumer sentiments and weak RM in 2017, which has impact on cost structure and margins. The continued tight bank lending requirement has also affected sales volume. Nevertheless, we expect national OEMs to sustain sales volume in 2017.

Valuation

• We maintain underweight on the sector. Our top picks are MBM (BUY; TP: RM2.75 ) and DRB (BUY; TP: RM2.22).

Source: Hong Leong Investment Bank Research - 10 Apr 2017