Highlights

• According to Malaysia Reserve, government is not planning to introduce the End of Life Vehicle (ELV) policy, despite the automotive market having achieved its maturity level.

• The decision was made due to public dissatisfaction. International Trade and Industry Minister Datuk Seri Mustapa Mohamed further clarified that a comprehensive study is needed before any further action on the matter.

• The proposal was first mooted in NAP 2006 when 2.7m passenger vehicles aged 10 years or above in 2006. There was another idea (implemented alongside with ELV) of introducing mandatory annual inspections as requirement for road tax renewal for all vehicles exceeding 15 years old.

Comment

• We are negative on government’s latest decision to halt the implementation of ELV after being dragged for a long period. Given the maturity of automotive market, we expect TIV growth to remain in the low single digit, in line with the projected population growth.

• Hence, we do not expect any short term boost in demand for the sector in the near term. Automotive OEMs will have to remain competitive in the near term with new launches, attractive pricing strategies and promotional campaigns in order to attain sales growth and outperform one another.

• Nevertheless, the minister did indicate that further comprehensive study to be done to follow up the policy.

• In our recent automotive sector outlook, we did not assume the implementation of ELV. Hence, there is no change to our forecasts and valuations for the sector. Furthermore, we do not expect the market to have priced in implementation of ELV in 2018.

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

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.

Valuation

• 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 - 11 Jan 2018