With the on-going Covid-19 outbreak, we now expect a drop of 8% YoY (from flattish) of TIV to 556k in 2020. OEMs e.g. Proton (DRB), Perodua (MBMR & UMW) and Honda (DRB) with new exciting launches are expected grab market share during this competitive year. We view that companies with high cash holdings in hand (e.g. MBMR and Pecca) and strong balance sheet (Sime Darby) are superior with strong ability to cover short term fix costs due to measures against Covid-19. The sector is also further dragged by the depreciating RM against USD and JPY in 2020, mainly affecting foreign OEMs. Given the recent plunge in share prices, we still maintain OVERWEIGHT on the Automotive sector on: 1) attractive valuation; 2) strong balance sheet; and 3) potential sector rebound in 2020. Top Picks are: 1) MBMR (TP: RM4.80); 2) Pecca (TP: RM1.05) and; 3) Sime (TP: RM2.00).

TIV. With the on-going global outbreak of Covid-19, there are increasing concerns on overall impact to the automotive industry, be it from weakening consumer demand or production disruption. We believe there will be spiralling effects on consumer sentiments in the near term, which will only be partially cushioned by government’s stimulus plans. Revisiting into past global financial crisis in 2007-2010 (see Figure #1), TIV remained relatively firm within this period, where it dropped slightly by 2.1% in 2009, but rebounded strongly in 2010. We now expect TIV to decline 8% YoY to 556k units (from existing 605k units) in 2020.

Leveraging on new models. 2020 TIV will remain challenging as consumers feel uncertain on the economy as the country braces for the effects of Covid-19. OEMs will need to leverage on new exciting model launches in 2020 to sustain sales volume and grab market share at the expense of others. During the period of 2007-2010, majority of OEMs’ earnings dropped YoY due to lower revenue and deteriorated margins in a competitive market, with the exceptions on Proton and BMW (see Figure #2). Proton enjoyed improved sales volume and margins in 2009, following the launch of new high volume Saga BLM and Exora MPV models in 2008-2009. BMW was also able to sustain sales and margins with new launches of higher margins X6, X1, Z4 and 7 series. We believe Proton and Honda will be able sustain their sales volume and margins in 2020-2021 given their attractive models line up (see Figure #3). On a more positive note, the whole automotive industry rebounded substantially in the following year 2010 with some OEM’s earnings doubled YoY (see Figure #2).

Source: Hong Leong Investment Bank Research - 24 Mar 2020