We recently upgraded the Auto & Autoparts sector to Overweight (from Neutral) as we believe the sector has bottomed out in terms of Total Industry Sales Volumes (TIV) and earnings. Abolishment of the GST and higher minimum wages, pledged by the new PH government, should lift household disposal income and consumer spending, reinvigorating the sector. We also recently upgraded Sime Darby, now our top large-cap sector pick and a country top pick. Among small caps, we like Pecca and MBM (upgraded to BUY), and also initiate coverage on BAuto with a BUY call and TP of RM2.64. We also upgrade UMW one notch to HOLD.

Tepid TIV Outlook in 2018; Strong TIV Boost in 2019

We expect a tepid TIV outlook in 2018 and look for 1% yoy growth to 582.4k units in 2018E (previous TIV estimate: 603.8k units) in anticipation of flattish 9M18E TIV as consumers react to the policy uncertainties, temporarily putting on hold big-ticket-item spending. Once the dust settles, likely by 4Q18, we believe removal of the goods-and-services tax (GST) and other encouraging policies will provide impetus for consumers to afford cars in the long run, leading to a revival of auto TIV. This coincides with the fresh replacement cycle due in 1H19E, in our view. Our 2019E TIV is at 600k units (+3% yoy).

Earnings Boost From a Stronger Ringgit

The RM’s sustained strength vs. the USD and JPY is positive for the auto sector. A stronger RM positively impacts auto margins as most auto players import cars/components in one of these currencies. In our auto universe, names with USD exposure include UMW (UMWH MK, RM6.12) and Pecca (PECCA MK, RM1.14, BUY), while BAuto (BAUTO MK, RM2.17), APM (APM MK, RM3.58, HOLD) and MBM (MBM MK, RM2.48) have JPY exposure.

A Bigger Pie for Perodua, Mazda and Luxury Marques

We think Perodua will continue to lead the local auto arena with a market share of 36% (MBM and UMW each hold a 20% and 38% stake, respectively). Elsewhere, we expect mid-range Japanese cars like Mazda to expand its market share to 3.8% within the non-nationals (2017A: 3.2%), driven by the Mazda CX-5 and new mid-variant Mazda 2. We also believe the luxury marques like BMW and Mercedes will continue to perform with the increasingly affluent consumers ‘trading up’ to more expensive non-national alternatives. We flag Sime Darby (SIME MK, RM2.80) and CCB (CNCB MK, RM2.00, HOLD) as potential plays on this theme.

Remain Overweight

After the elections, Affin upgraded the sector to Overweight (Making Malaysia great again?), as we expect it to fare well for investors in coming quarters due to: 1) a pick-up in consumer spending, 2) aggressive launches from 2H17, and 3) sustained strength of the RM. Thus, we believe the sector’s CY18E PER of 18x has potential for a re-rating. Key downside risks: i) economic slowdown; ii) weaker-than-expected TIV sales; and iii) further tightening of auto financing.

Source: Affin Hwang Research - 16 May 2018