We recently hosted an Auto Day with the participation of the Malaysia Automotive Institute (MAI), an agency under the Ministry of International Trade & Industry, the Malaysia Automotive Association (MAA) and four auto players, namely Sime Darby, UMW Holdings, Bermaz Auto (BAuto) and Pecca Group. Fifty local institutional investors attended our event. We note that interest toward the sector remains positive but prospects hinge on the development of the National Automotive Policy (NAP) 2018 review. Our sector BUYs remain BAuto, Sime Darby, MBM Resources and Pecca.

MAI: NAP 2018 review, an enhancement of NAP 2014; further consideration to include restrictions on foreign car imports

MAI guided that the NAP 2018 review will be based on the foundation of NAP 2014 with additional pillars, namely: i) mobility, ii) next-generation vehicles, iii) Artificial Intelligence and iv) the Industrial Revolution 4.0. The rollout of the policy may see some delays, as the government mulls imposing new conditions on imported cars to prioritise local brands. In our view, the tougher restrictions could potentially only target the reconditioned (recon) car market rather than the locally listed foreign carmakers, as we do not expect the government’s new policy to negatively impact local assembly operations, which could then also have a detrimental impact on the entire automotive ecosystem.

MAA Cuts 2018 TIV to 585k Units, Expects a Better 2019

MAA revised its 2018 Total Industry Sales Volume (TIV) forecast down to 585k units (+1.5% yoy) from 590k units (+2.3% yoy), expecting a shortterm dip in demand post implementation of the Sales and Service Tax (SST) in September 2018. Sales should pick up again by year-end due to the usual festive promotional activities. Besides the uncertainty in government policies and impact from the re-introduction of SST, MAA believes other issues like the highly-saturated local auto market, lack of economies of scale and high excise duties remain the dampeners to domestic auto growth.

Positive Feedback From the Four Listed Companies

Four of the companies shared their positive vibes on the three-month ‘tax holiday’ boost. Sime believes that the SST sticker price will not deter premium car purchases moving forward. Similarly, BAuto remains bullish on its Mazda car demand, considering it is the only auto player that will absorb SST for bookings made before 1 September. UMW expects to see a better 2019, driven by its healthy product pipeline and extensive product offerings from Komatsu. Pecca will continue to ride on the sustained growth in Perodua car sales.

Maintain OVERWEIGHT, Watch for Updates on NAP 2018

We reiterate our Overweight stance on the auto sector, expecting a recovery of the TIV and improvement in companies’ profit margins. We like Sime Darby (BUY), BAuto (BUY) and MBM (BUY). However, we are watchful for the news flow on NAP 2018 review as the assessment intends to encompass: 1) a new national car project, 2) development of local companies and 3) stepping up on exports.

Source: Affin Hwang Research - 3 Aug 2018