We project 2021 TIV at 585.4k units, a growth of +14.0% YoY (due to low base effect from 2020). TIV will be well supported by the extension of SST exemptions into 1H21 and several exciting new models launch by various marques, especially Proton (DRB), Perodua (MBMR & UMW), Honda (DRB), Toyota (UMW) and Nissan (TCM). Furthermore, the sector is expected to benefit from RM appreciation against USD and JPY in 2021. We expect domestic OEMs Proton (DRB) and Perodua (MBMR & UMW) to continue outperform their competitors. Maintain OVERWEIGHT on Automotive sector, with BUY recommendations on DRB (TP: RM2.77), MBMR (TP: RM5.70), Pecca (TP: RM1.84) and Sime (TP: RM2.68). The SST exemption extension was indeed a positive surprise to continue to fuel interest in the sector.

TIV. For 11M20, TIV registered a drop of -17.3% YoY, affected by Covid-19 pandemic and implementation of MCO (especially in 1H20), but was partially cushioned by the implementation of SST exemption measures. For 2020, we expect a drop of -15.0% YoY to 513.5k units, and a rebound of 14.0% YoY for 2021 to 585.4 units, mainly driven by extension of SST exemptions into 1H21 and several new attractive launches by end 2020 and early 2021, as well as low base effect from 2020.

Leveraging on new models. The overall 2021 TIV landscape will continue to be challenging with stiff competitions across the board. We expect OEMs with the advantage of new models to have higher chances to grab market share in 2021 at the expense of the others. OEMs with exciting new models include Proton (DRB) – X50 CKD and new Geely-based model; Perodua (UMW & MBM) – D55L SUV; Honda (DRB) – City and Jazz; Toyota (UMW) – Vios and Yaris; and Nissan (TCM) – Almera.

Sustaining consumer sentiment. The strong rebound in CSI to above 90 points in 2Q20 and 3Q20 (from low of 51.1 points in 1Q20), indicates recovery of consumer sentiment and spending as the economy opens up with on-going government’s relieve and stimulus measures. We expect consumer sentiment to sustain into 2021 (due to growing optimism of vaccine availability, gradual opening up of global economy, low interest environment and on-going government stimulus plan), supporting demand for new vehicles.

Low interest rate. The cumulative -125 bps reduction in OPR in 2020 will provide certain degree of cost savings, making it conducive for new car purchases. We estimated a -25 bps effect on monthly instalment of -RM15/month (based on RM80,000 car price, with 90% loan application and 9-year loan period). For 2021, we expect BNM to maintain it at the current low level of 1.75% as Malaysia’s growth outlook remains exposed to downside risks from further resurgence of Covid-19 cases resulting in prolonged movement restriction measures.

RM appreciation. We expect RM to appreciate further against USD to average 4.00 level in 2021 (vs. avg 4.21 in 2020), and similarly JPY (x100) to average 3.865 level (Bloomberg forecast) in 2021 (vs. avg 3.9363 in 2020). Stronger RM will lower the effective input costs for imported CBU cars, CKD packs and raw materials, and subsequently improve 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, as the SST exemption extension was indeed a positive surprise, helping to fuel TIV numbers into 1H21. Our top picks are DRB (BUY, TP: RM2.77), MBMR (BUY, TP: RM5.70) and Pecca (BUY; TP: RM1.84), for their strong leverage onto the national OEMs i.e. Proton and Perodua. We also have BUY recommendation on Sime (BUY, TP: RM2.68), on strong rebound on China market and long term sustainable Australia mining sector.

Source: Hong Leong Investment Bank Research - 6 Jan 2021