Highlights

• 2018 TIV is expected to step up further to 600.6k units (+2.0% yoy) driven by stronger sales from passenger car segment. We believe Perodua will maintain its leading market position in Malaysia boosted by new MyVi model and expected new SUV model by mid-18, while Honda will maintain its lead in non-national market segment.

• We expect consumer sentiment to retain its uptrend in 2018 , further driving demand growth for new vehicles . YTD 2017 TIV growth was in line with improvement in consumer sentiment (indicated by CSI).

• We believe the impact from banks’ tighter lending guideline has normalized in 2017 , as indicated by the flattish approved hire purchase loan and higher approval rate for 11M17. With banks expected to pursue asset growth and consumer sentiment to step up in 2018, the applied loan and approval rate will improve, supporting our expected TIV growth of +2.0% in 2018 . The expected one-off OPR hike of 25bps as early as Jan 2018 should not materially impact consumer decision on vehicle purchase.

• End of Life Vehicle (ELV) is currently in final stage of study and may be implemented as early as in 2H18 . The implementation of ELV and potential subsidies of RM4- 5k by government will encourage old vehicle owners to change to new vehicle, and hence push up TIV in the near term . Perodua (MBM & UMW) and Proton (DRB) are the main beneficiaries for their dominance in affordable A and B segment car.

• The RM is expected to trade at RM4.00-4.20/US$ in 2018 (average: 4.10), an appreciation from average RM4.33 in 2017, benefitting automotive companies with lower import cost as 30%-60% of import CKD parts and auto components are denominated in foreign currency.

• However, the benefits may be offset (or partially) by the surge in global steel and aluminum price , which accounts c.47% of the material costs of vehicle. We estimated overall vehicle production costs to increase by 5- 6% yoy in 2018. OEM principals (i.e. Perodua and Proton) will have the full impact, while OEM distributors/importers may not face the full impact, depending on the negotiation with OEM principals and suppliers.

Risks

• Prolonged tightening of banks’ HP rules.

• Slow pace in the Malaysian economy.

• Global automotive supply chain disruption.

• Sudden jump in fuel prices and interest rate.

Rating

NEUTRAL ( ↔ )

• The sector is expected to be supported by rebounding TIV growth in 2018, with improvement in consumer sentiment and normalizing impact from tighten bank guideline. While stronger RM will improve the industry margins, the higher basic material costs may offset (partially offset) the benefits of RM appreciation.

Top Picks

• We maintain NEUTRAL on the sector. Our top picks are PECCA (RM1.95) , MBM (RM: 2.68) and DRB (RM2.60) .

Source: Hong Leong Investment Bank Research - 4 Jan 2018