We expect banks to maintain their loan approval rates as it is hovering between 50-60% and weak ringgit post GE14 at USD/MYR3.90-4.10 in 2H18 will be a concern. However, we believe the risk will be offset with the spike in sales thanks to zerorisation of GST during Jun-Aug 2018 period before SST being reintroduced in Sep. We maintain our TIV assumption at 588.1k units (+2.0% YoY) for now and NEUTRAL rating on the sector. Our top picks are Pecca (BUY; TP: RM1.35), DRB-HICOM (BUY; TP: RM2.50) and MBM Resources (BUY; TP: RM2.84).

Strong demand during tax holiday period. With the “zerorisation” of GST in place between 1 Jun to 31 Aug 2018, the retail car prices have been lowered by 6%. Consumers are taking advantage of the tax holiday window to enjoy the lower prices, driving up car sales volume. However, we expect sales to plunge post restatement of SST on 1 Sep 2018. Our channel checks suggest that the return of the SST will see car prices become slightly more expensive at 1-3% (vs. GST regime). Nevertheless, we expect market to normalize by end 2018 when OEMs again engage in aggressive year-end sales campaigns.

Bank lending policy. Tighter bank lending policy had been imposed by BNM since 2012, which subsequently saw tightening of loan processes and affected the approvals for hire-purchase loans (car loans). Nevertheless, we are of the view that the improved consumer sentiment and rejuvenated middle-income household segment may negate this factor, in tandem with the expected commendable economic growth of 5.2% in 2018.

Weak RM ahead. Malaysian automotive industry has been importer for vehicle parts and components, CKD-kits and CBU units, which are mainly denominated USD. The depreciation of RM will affect the margins of Malaysia automotive companies especially UMW and TCM given the huge cost of sales are denominated in USD. RM has depreciated against USD post GE14 and thus we have lowered our USD/RM assumption to 3.90-4.10 for the rest of the year (previous: USD/RM3.85-4.00).

Maintain TIV assumption at 2% growth. According to MAA, cumulative vehicles sales for the period Jan-Jun 2018 has improved to 289.7k units (+1.9% YoY) on strong Jun month sales (+28.3% YoY), attributed to the first month of the tax holiday period. With the tax holiday in place, aggressive year-end sales campaigns as well as introduction of new models (Figure #2) in 2H18, we believe overall TIV to catch up in 2H18. We maintain our 2018 TIV assumption of 588.1k units (+2.0% YoY). 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 - 20 Jul 2018