A Window of Opportunity

Coming hot on the heels of the zero-rated Goods and Services Tax (GST) effective June 1, 2018 (presently GST of 6%), the auto industry could experience a temporary shot in the arm as buyers take advantage of cheaper car prices (in the absence of both GST and Service and sales tax, SST) and attractive Hari Raya promotions. Beside the removal of GST, we believe that with improved confidence, a stronger middle income segment, lower excise duties on imported cars <1,600cc, a firmer Ringgit and tantalising model launches will see a broad recovery of the Total Industry Volume (TIV) in 2H18-2020E. Reiterate Overweight on the auto sector.

Zero-rated GST – a Temporary Boost for Auto Sales

With the newly-revised zero-rated GST and the absence of SST (until further notice), our channel checks indicate that auto players are adopting a variety of pricing strategies although predominantly pointing towards lower prices, which in our view may bring forward the replacement cycle. Thus far, Nissan (Tan Chong), Subaru, and Proton (Drb-Hicom) have responded by offering ‘price protection scheme”, offering refunds/ service vouchers to cover the car price fluctuation, ahead of the impending SST. Others, like MINI, Honda, Toyota (UMW) and Volvo are cutting prices, excluding the additional 6% GST charge. The new development alongside with the ongoing Hari Raya promotions from automakers, is likely to excite buyers to flock into showrooms again, leading to a temporary TIV boost.

Expect Minimal Car Price Hike Post SST

Highlighted in our auto sector report (Amidst the uncertainty, an opportunity), the reintroduction of SST will likely see a car price increase. While the level of price increase remains uncertain, the tax migration will reverse the previously lowered sticker prices since the implementation of GST (prices dropped ~1-3% previously). Nevertheless, we believe the impact will be minimal, as a sharp hike in prices will hurt auto sales, hurting profits and market share. Moreover, the RM has been favourable to the automakers while the removal of GST will also see a stronger middle-class segment that can afford big-ticket purchases, we opine.

Maintain Overweight

Our 2018 TIV forecast remains unchanged at 582.4k units (+1% yoy). We expect the auto sector to fare well for investors in coming quarters due to: 1) a strong pick-up in consumer spending, 2) aggressive model, 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. Our sector preference: Sime Darby for big-cap exposure; BAuto and MBM as our preferred small-mid cap picks.

Source: Affin Hwang Research - 21 May 2018