The implementation of SST 2.0 (vs. GST) has seen lower pricings for CKD vehicles but higher for CBU vehicles due to exemption on domestic sourced supply chain for CKD vehicles under SST 2.0. OEMs with high localised contents e.g. Proton (DRB) and Perodua (UMW & MBMR) are best positioned to benefit from SST 2.0. Nevertheless we expect overall TIV to take a dip post SST 2.0 implementation, with exceptions on OEMs with exciting new launches such as Proton (X70), Perodua (Axia facelift), Honda (HR-V facelift) and Mazda (CX-3 facelift) to support sales volume in 4Q18. Furthermore, weakening of RM/USD may drag OEMs with USD exposure (e.g. Toyota and Nissan) on higher input costs. We maintain our 2018 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: RM2.80) and MBM Resources (BUY; TP: RM3.04).

Lower car price for CKDs but higher for CBUs. Post the implementation of SST 2.0 on 1 Sep 2018; OEMs in general have announced lower prices by up to 5.6% for CKD vehicles and higher prices by up to +4.3% for CBU vehicles as compared to previous GST inclusive prices (Figure #1). We are positively surprised with the lower prices for CKD vehicles, as we were anticipating for a hike of 1-3%. We understand that the lower CKD vehicle prices were made possible due to the tax exemption for domestic sourced parts and components for locally assembled CKD vehicles. Hence, SST 2.0 is more favourable towards national OEMs (i.e. Proton and Perodua) and followed by foreign OEMs with high CKD program (e.g. Honda, Toyota and Nissan). We believe DRB and MBMR are the biggest beneficiaries, for their high leverage on Proton and Perodua respectively.

New models to support 4Q18. Post SST 2.0, we expect a dip in TIV, as majority of consumers would have placed orders before the end of the GST zerorisation period by end Aug 2018. Nevertheless, we expect OEMs to address the expected dip with promotional sales campaigns and new model launches (Figure #2) to keep the market excited. We expect the upcoming new launch of Proton X70 SUV model in Oct 2018 to bring significant improvement to Proton (DRB) sales volume, given its attractive features and design with affordable pricing range. On the other hand, Perodua (UMW & MBMR) is banking on the recent launch of Alza facelift (Sep 2018) to support its sales in 4Q18, while real excitement will take place in 1Q19 when the new SUV model is launched (Feb 2019). Both Honda (DRB) and Mazda (BAuto) are expected to be in relatively better position with new facelift models HR-V and CX-3.

Weak RM ahead. RM has depreciated against USD notably to RM4.13/USD since Mar 2018 (Figure #3). A depreciating RM against USD is negative to OEMs with imported CKD packs and CBU units, due to higher imported costs and subsequently margin erosion. Under our coverage, Nissan (TCM) and Toyota (UMW) have the largest exposure towards USD. On the other hand, RM against JPY has remained relatively stable, and hence, we expect Honda (DRB) to be in a stronger position as compared to the other OEMs.

Maintain TIV assumption of 588.1k units (Figure #4) for 2018. The strong growth for Jun-Aug period (average +31.9% YoY) due to GST zerorisation has pushed YTD TIV growth to an exceptional +10.1% YoY. However, we expect TIV to sequentially dip for Sep-Dec 2018 from SST 2.0 implementation, on higher car prices (vs. GST zerorisation period) and brought forward purchases before Sep. Hence, we maintain our 2018 TIV assumption at 588.1k units (+2.0% YoY).

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 SST 2.0) as well as weakened RM/USD outlook. Our top picks are PECCA (BUY; TP: RM1.35), DRB-HICOM (BUY; TP: RM2.80) and MBM Resources (BUY; TP: RM3.04).

Source: Hong Leong Investment Bank Research - 26 Sept 2018