With the temporarily ‘zerolisation’ of GST from 1 Jun 2018 to 31 Aug 2018, we expect a short term spike in TIV, as consumers take advantage of the effective cheaper car prices prior to the implementation of 10% SST effective 1 Sep 2018. However, TIV is expected to decline substantially post SST implementation. The higher car sales enjoyed by OEMs during the tax holiday period will be partly offset by the lower sales from Sep 2018 onwards as well as weakened RM/USD outlook in 2H18. Maintain NEUTRAL rating on Automotive sector with top pick Pecca (BUY; TP:RM1.35), DRB-HICOM (BUY; TP:RM2.50) and MBM Resources (BUY; TP:RM2.84).

‘Zerolisation’ of GST. OEMs have been enjoying brisk car sales since mid-May 2018, after announcing various GST subsidy measures ahead of government’s implementation of zero-rated GST (from previously 6% GST) effective 1 Jun 2018 until 31 Aug 2018. The GST relieve is in tandem with the already attractive Raya promotional sales packages, further enticing consumer to purchase new cars in MayAug period. Some OEMs have commented that car sales had grown by c. 50%. OEMs have been scrambling to increase production/assembling volume and import volume in order to meet the spike in demand, as the waiting period for some car models have increased to 3-4 months. Hence, we can expect a spike in TIV for MayAug period.

However, we understand that the OEMs will have to absorb the cost related to the GST subsidy measures (in terms of rebates, discounts, vouchers and free services) for new car delivery being invoiced before 1 Jun 2018. Perodua is estimated to have absorbed RM40m for the GST subsidy.

Implementation of SST. The implementation of 10% SST starting 1 Sep 2018 will affect TIV from Sep 2018 onwards, given the effective higher car prices as well as consumers have already bring forward their purchases prior to SST implementation. OEMs have clarified that new car delivery being invoiced from 1 Sep 2018 would be subject to the SST and consumer would need to bear the SST.

Weakened RM outlook. In tandem with the positive economic outlook of the US economy and uncertainty on global trade, RM is expected to weaken against USD towards 2H18. We have revised our exchange rate projection to USD/RM3.90-4.10 for the rest of the year (previous: USD/RM3.85-4.00). Weakened RM will increase the effective input costs for imported CBU cars, CKD packs and raw materials, and subsequently affect OEMs’ margins. Major OEMs that have exposure towards USD include UMW Toyota (UMW) and Nissan (TCM).

Establishing of a new national car. New PM Tun Dr. Mahathir has raised the possibility of establishing a new national car project during Nikkei Conference in Tokyo. The new national car project may be a partnership with other South East Asia countries. However, we believe the initiative is an uphill task, given Malaysia market is already maturing, while the major international OEMs have already established their hubs in both Thailand and Indonesia. The development of a new national car project will involve an enormous investment budget and long gestation period, which we believe the government is currently lacking. Hence, we do not expect any new protectionism measures to be implemented in support of a new national car project.

We maintain NEUTRAL on the sector. The benefits from the expected spike in car sales in Jun-Aug period (during 0% GST) will be partly offset by the sales downturn in Sep-Dec period (implementation of 10% SST) as well as weakened RM/USD outlook.

Our top picks are PECCA (BUY; TP: RM1.35), DRB-HICOM (BUY; TP: RM2.50) and MBM Resources (BUY; TP: RM2.84).

Source: Hong Leong Investment Bank Research - 18 Jun 2018