With 1H19 TIV at +2.1% YoY, we expect 2H19 to slow down due to high base effect last year. Proton (DRB) and Perodua (UMW & MBMR) outperformed the market, mainly due to high demand for X70 and Aruz respectively. We expect 2H19 to remain driven by new model launches, benefitting Proton, Perodua, Toyota (UMW), and Mazda (BAuto). Furthermore, market may relook into the successful restructuring exercises within the sector which include Proton (DRB & Pecca) and MBMR. Upgrade to OVERWEIGHT (from Neutral) with top picks being DRB (TP: RM3.03) and BAuto (TP: RM3.08).

1H19 TIV… achieved +2.1% YoY growth to 295.9k units, within HLIB’s expectation as we expect a drop in 2H19 TIV due to high base effect (strong sales during GST free period). Key outperformers include: 1) Proton (+60.5% YoY), strong demand for X70 CBU, facelift Persona, Iriz and Exora; 2) Perodua (+4.0% YoY), strong demand for Aruz, partially offset by slowdown in other models. Toyota (+0.6% YoY) sales was disappointing despite new Vios and Yaris, as Toyota was gradually ramping up production at its new ASSB Bukit Raja Plant (commenced operation in Jan 2019).

2H19 TIV… will be driven by attractive new launches by OEMs since end 2018 and eventually continue to grab market share in 2H19 at the expense of the others. OEMs with exciting new models include Proton (DRB), Toyota (UMW), Perodua (UMW & MBM) and Mazda (BAuto).

Restructuring play. Major restructuring within automotive sector include Proton and MBMR. Proton has been showing strong progress with improving bottom line, driven by strong sales growth of new models and continued cost cutting measures. Major beneficiaries of Proton restructuring include DRB (direct 50.1% stake in Proton and major parts and components supplier to Proton) and Pecca (supply leather seats to Proton). MBMR has ceased its loss making OMI Alloy operations by end 1H19, which will improve its bottom line in 2H19 and 2020, while the 22% stake disposal in Hino Motors Sales and Manufacturing will continue to improve MBMR’s balance sheet (net cash) and potentially allow for higher dividend payout for FY19.

RM depreciation. We expect RM/USD to average 4.05-4.15 in 2019 as compared to 4.0351 in 2018, while RM/JPY to remain stable at average 378 level in 2019 (vs. average 364 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).

Upgrade to OVERWEIGHT (from Neutral), primarily on a stock selective approach with 4 BUY recommendations, 2 HOLDs and 1 SELL. Our top picks include: 1) DRB (TP: RM3.03) and 2) BAuto (TP: RM3.08).

DRB. Maintain BUY recommendation with unchanged TP of RM3.03 (based on 10% discount to SOP of RM3.37) leveraging on the improving Proton sales and Proton’s turnaround. We are confident on Geely’s commitment for Proton’s strategic plan to become major OEM in Malaysia and third in South East Asia region.

BAuto. We maintain BUY recommendation with unchanged TP of RM3.08, based on unchanged CY20 P/E of 14x, supported by: 1) healthy balance sheet with net cash position of RM320.2m (27.5 sen/share); 2) attractive new model line up to sustain sales momentum, generating strong cash flow; and 3) high dividend yield of 6.7-7.5%.

Source: Hong Leong Investment Bank Research - 9 Jul 2019