The Malaysian government has announced a sales tax exemption for vehicles, which spans from June 15 to December 31, 2020. The exemption will likely revive the subdued car demand, but we think that the challenging macro-economic challenges will continue to hurt pockets of discretionary consumption. As such, we keep our Total Industry Volume (TIV) forecast of 485k units (-20% yoy) unchanged. However, given the increased market liquidity, we upgrade the Auto sector to NEUTRAL (from Underweight), with Bermaz Auto (upgrade to BUY) our preferred sector pick.

Sales Tax Exemption on Cars for the Next 6 Months

Under the Economic Recovery Plan (or Penjana), Malaysia’s Prime Minister announced a sales tax incentive of up to 100% for CompletelyKnocked Down (CKD) vehicles and 50% on Completely Built Up (CBU) vehicles from June 15, 2020 to December 31, 2020. Under the Sales and Service Tax (SST) regime, all vehicles are subject to a 10% sales tax.

Cheaper Car Price-tags to Ease Post-MCO Woes

Our preliminary checks indicate that car prices could be lower by an estimated 3-8%. We gather that the adjustment to car retail prices is not clear cut because of the different Industrial Adjustment Fund rebates granted to respective car models. In addition, we think automakers may even take advantage to roll out new model launches, dole out additional discounts and pull out every incentive to clear out the piled-up inventory and to weed out the competition.

We Are Doubtful That the Incentives Will be a Mega Injection to TIV

While we do not discount that this incentive, coupled with the cheaper oil prices and lower hire purchase loan rates may tempt new-car buyers, however we think that the challenging macro environment (ie, high unemployment and lower disposable income due to pay cuts) will see Malaysians deferring purchases of big-ticket items. We think Malaysians may even consider commuting with the MY30 unlimited travel pass to cope with the economic shock. Furthermore, we sense that many Malaysians are adapting to the work-from-home setting, hence cars may not be perceived as a necessity in the coming months.

Maintain TIV Forecast at 485k Units

We keep our TIV forecast at 485k unchanged (-20% yoy from 2019’s 604k units) as the sales-tax exemptions should limit a sharp contraction in sales as seen in the April YTD TIV figures. Notably, the Malaysian Automotive Association (MAA) has yet to revise its targeted 2020 sales volume of 400k (-34% yoy). Its last forecast was post the Covid-19 pandemic and the resulting Movement Control Order which clobbered Malaysia’s vehicle market – 4M20 Total Industry Volume plunged by 43% yoy to 106.6k units. Please refer to page 2 for our rating and target price changes.

Source: Affin Hwang Research - 9 Jun 2020