With the expectation 2018 TIV growth of +4.5% YoY, we expect 2019 TIV to drop by 1.0% YoY, due to high base effect and moderating consumer sentiments, as well as weakened outlook of RM. Nevertheless, OEMs with new models will have higher changes of grabbing market share in 2019. Maintain NEUTRAL on Automotive sector (we have downgraded the sector from Overweight in our Strategy Report dated 19 Dec 2018) with Top Picks on BAuto (TP: RM2.70), DRB (TP: RM2.80) and Pecca (TP: RM1.35).

TIV. For 11M18, Malaysia TIV registered a strong growth of +5.5% YoY, thanks to the strong sales during tax holiday period (Jun-Aug). We now expect 2018 TIV growth at +4.5% YoY to 602.6k units. With a high base in 2018 and expectation of moderating consumer sentiment in 2019, we expect 2019 TIV to drop 1.0% YoY to 596.6k units.

Leverage onto new models. 2019 TIV will be challenged by the moderating consumer sentiment as well as front-loaded purchases during GST zerorisation period in Jun-Aug 2018. Hence, we expect OEMs with the advantage of new models to have higher chances to grab market shares in 2019 at the expense of the others. OEMs with exciting new models include Proton (DRB), Toyota (UMW), Perodua (UMW & MBM) and Mazda (BAuto).

RM depreciation. We expect RM/USD to depreciate further to 4.10-4.30 (average 4.20) in 2019 as compare to average 4.0351 in 2018, while RM/JPY to remain stable at 3,700-3,800 level in 2019 (vs. average 3,635.2 in 2018). 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 major exposure towards USD include Toyota (UMW) and Nissan (TCM), while JPY include Honda (DRB) and Mazda (BAuto).

Maintain Neutral on Automotive sector (we have downgraded the sector from Overweight in our Strategy Report dated 19 Dec 2018), given the moderating outlook of the sector in 2019, with overall lower TIV and weakened outlook on RM. Our Top picks include: (1) BAuto; (2) DRB; and (3) Pecca.

BAuto. Maintain BUY recommendation on BAuto with unchanged TP of RM2.70 based on CY20 P/E of 14x, supported by: (1) healthy balance sheet with net cash position of RM403m (34.7sen/share); (2) sustainable sales growth, generating strong cash flow; and (3) high dividend yield of 7.0-9.0%.

DRB. Maintain BUY recommendation with unchanged TP of RM2.80 (based on 10% discount to SOP of RM3.12) with the indicative strong demand for newly launched Proton X70. We are positive on Geely’s commitment in turning around Proton, with Proton foraying into China market as well as regional ASEAN market expansion.

Pecca. Maintain BUY recommendation on Pecca with unchanged TP of RM1.35 based on PE 13x of FY20 profit. We remain positive on Pecca’s strong operating cash flow of RM16-24m per annum (for FY19-21) on top of its current net cash position of RM97.1m (translating into 52.9 sen/share).

UMW. Maintain SELL recommendation on UMW with unchanged TP of RM4.75 based on 10% discount to SOP of RM5.28. We have previously downgraded UMW from Buy recommendation (Strategy Report dated 19 Dec 2018) following the run-up of share price and HLIB’s cut in UMW’s FY18-20 core earnings by 10-16%, to include the distribution of RM70m p.a. for Perpetual Sukuk.

Source: Hong Leong Investment Bank Research - 4 Jan 2019