We project 2020 TIV at 605.0k units (flattish YoY), supported by Proton (DRB), Perodua (MBMR & UMW) and Honda (DRB) with exciting new models launches. However, the sector is expected to be dragged by continued RM depreciation against USD and JPY in 2020, mainly affecting foreign OEMs. We expect domestic OEMs Proton (DRB) and Perodua (MBMR & UMW) to outperform their competitors. Maintain OVERWEIGHT on Automotive sector, with Top Picks being DRB (TP: RM3.50), MBMR (TP: RM5.50) and Sime (TP: RM2.70).

TIV. For 11M19, TIV registered a slight drop of 0.2% YoY due to high base effect of strong sales during last year’s Jun-Aug 2018 tax free period. We see slight upside potential to our 2019 conservative TIV of 596.6k units to 604.7k units, as we expect encouraging monthly sales volume in Dec 2019, supported by continued strong demand for new model launches by Proton, Perodua and Toyota. For 2020, we forecast TIV of 605.0k units, a relatively flattish YoY, mainly driven by sustainable sales volume of national OEMs i.e. Proton and Perodua as well as Honda, following the excitement of expected new model launches next year.

Leveraging on new models. 2020 TIV will continue to be challenged by moderating consumer sentiment. We expect OEMs with the advantage of new models to have higher chances to grab market share in 2020 at the expense of the others. OEMs with exciting new models include Proton (DRB) – X70 CKD & X50 CKD, Perodua (UMW & MBM) – D55L SUV and Honda (DRB) – City, Jazz & Accord.

RM depreciation. We expect RM/USD to depreciate further to average 4.15-4.20 level in 2020 as compared to the average of 4.14 in 2019, and similarly RM/JPY to depreciate to average 3,900-3,950 level in 2020 (Bloomberg forecast) from the current 3,800 level. Weakened RM will increase the effective input costs for imported CBU cars, CKD packs and raw materials, and subsequently affect OEMs’ margins. OEMs that have major exposure towards USD include Toyota (UMW) and Nissan (TCM), while for JPY this includes Honda (DRB) and Mazda (BAuto).

Maintain OVERWEIGHT, on selective stock approach with 5 BUY and 2 HOLD recommendations. Our top picks are DRB (BUY, TP: RM3.50), MBMR (BUY, TP: RM5.50) and Sime (BUY, TP: RM2.70).

DRB. Maintain BUY recommendation with unchanged TP of RM3.50 (based on 15% discount to SOP of RM4.13) with expected strong demand for upcoming Proton X70 CKD and X50 CKD. Proton has returned into black for the third consecutive quarter. We are positive on Geely’s commitment in Proton’s growth, with Proton foraying into China market as well as regional ASEAN market expansion.

MBMR. Maintain BUY recommendation with unchanged TP of RM5.50 (based on 10% discount to SOP of RM6.13). MBMR is currently in a net cash position of RM105.4m (27sen/share) with continued earnings and cash flow growth, by leveraging onto the sustaining Perodua sales. We project dividends of 18 sen (FY19), 24 sen (FY20) and 26 sen (FY21), translating to attractive yields of 4.6%-6.7%.

Sime Darby. Maintain BUY recommendation with unchanged TP of RM2.70 (based on 10% discount to SOP of RM3.00), supported by strong demand for industrial equipment from Australia mining, China infrastructure, and potentially upcoming mega projects in Malaysia. Sime Darby is also seen as a proxy to the potential trade agreement between US and China. We project dividend of 12 sen for FY20-22, translating into attractive dividend yield of 5.3%.  

Source: Hong Leong Investment Bank Research - 3 Jan 2020