July auto sales rose stronger-than-expected by 14% yoy to 48.6k units supported by strong growth in passenger vehicle sales (+16% yoy) and marginal growth in commercial vehicle sales (+4% yoy). Production increased by 12% yoy to 43.9k units in July. For 7M17, total industry volume (TIV) sales increased by 5% yoy to 333k units. New model launches will drive the TIV sales growth in 2H17. Maintain UNDERWEIGHT call on 2017E sector earnings contraction.

Shrinking Market Share for Local Marques

Perodua reported sales of 18.9k units (+6.2% mom, +25.1% yoy), bringing cumulative 7M17 sales to 118.6k units (+5.4% yoy). This was mainly attributable to the introduction of two new face-lifted models, ie, Axia and Bezza in early-2017. Its market share increased to 35.6% in 7M17 from 35.4% in 7M16. Meanwhile, Proton registered sales of 6k (-17.6% mom, +54% yoy) and cumulative 7M17 sales of 45.3k units (+14.5% yoy). Proton’s market share grew from 12.5% to to 13.6% in 7M17.

Market Share Growing for Japanese Brands

Toyota sales crept up to 5.6k units in July (+3.3% mom, +8.5% yoy). However, Toyota’s market share continues to be overshadowed by Honda, which saw July sales of 8.6k units (-2.6% mom, +9.6% yoy). Nevertheless, both marques have seen strong sales improvement compared to the low base in 2016 – Toyota achieved sales of 39.7k units (+20.3% yoy) and Honda hit 61.1k units (+28.7% yoy) in 7M17. Honda’s 2017 car sales target of 100k units is supported by the well-received new models launched, ie, BRV, facelifted City, face-lifted Jazz, new CR-V, and City Hybrid. Honda (+2.6 ppt to 17.5%), Toyota (+1 ppt to 11.4%) and Nissan (+1.7 ppt to 9.3%) saw market share expanding in 7M17 at the expense of Perodua and other non-Japanese marques.

Maintain UNDERWEIGHT

7M17 TIV sales volume comprise 56% of our 2017E TIV sales of 592k (+2% yoy). If growth momentum remains strong in 2H17 supported by new model launches in the pipeline, there is upside risk to our 2017E forecast. Our TIV growth assumption is premised on improving consumer sentiment and promotional activities driving car sales. We maintain UNDERWEIGHT

on the sector as we downgraded UMW Holdings to a SELL in May post- 1Q17 result. For sector exposure, we prefer MBM Resources (HOLD), which is trading at lower PERs.

Key Risks

Risks to our Underweight call include: i) minimal compression in profit margins; and ii) stronger-than-expected TIV sales. Further downside could come from: i) prolonged tight auto financing requirements imposed by banks; ii) exchange rate risk; and iii) a slowdown in the economy.

Source: Affin Hwang Research - 21 Aug 2017