May 2020’s Total Industry Volume (TIV) recovered to 23k units (from 141 units in April 2020) as the government gradually relaxed some of the restrictions it had imposed under the Covid-19 Movement Control Order (MCO) period in early May 2020. However, May 2020 TIV was still lower by 62% yoy. Although 5M20 TIV of 129.6k units (-49% yoy) only accounted for 27% of our full-year TIV forecasts, auto sales are expected to pick up sequentially, with the help of cheaper car prices from the sales tax exemption introduced in early June. Maintain Neutral on the auto sector; UMWH is our country and sector top pick.

Better Sales Improvement Mom, on Low Base Effect

Most automakers experienced a recovery in May 2020 sales volume (Fig 1) although sales were still down 62% yoy, as most automotive-related operations were shut in April 2020, following the extension of the MCO; the Road Transport Department had only resumed new car registrations from May 13th. In terms of market share, the national brands still led the automotive market: 5M20-market share at 62% (vs. 5M19: 55.8%).

Car Prices Are Revised Downwards by 2-5% Post SST Exemption

With the price adjustments made by the respective carmakers, Malaysians can now take advantage of a cheaper ride (lower by 2-5%), following the

sales tax incentive announced in the government’s PENJANA economic recovery plan. Besides relying on the tax incentive, we learnt that carmakers have also been encouraged by the government to dole out additional incentives (ie, added discounts, cashbacks, exclusive gifts, additional warranties, etc) to lure customers.

Car Launch Conundrum; Players to Realign Strategies Over Outbreak

As for new model launches, we sensed a mixed reaction among the carmakers, whereby some launches are still on track to be unveiled in 2H20, while others may be deferred to next year. Notably, many automakers have yet to revise their 2020 sales targets; and we think they may need to go back to the drawing board to realign strategies and production schedules with their respective principals and vendors. We acknowledge that there is also uncertainty over how Malaysians would behave as we exit the MCO, given the imminent wage cuts and higher unemployment rates.

Maintain NEUTRAL

We maintain our NEUTRAL rating on the auto sector. For sector exposure, we like UMWH on resilient demand for Perodua and riding on fresh model line-ups from Toyota. Key risks to our call include: 1) higher-/lower-thanexpected car sales volume, 2) tighter bank lending policies, 3) intensifying price competition; 4) fluctuation of RM vs US$/JPY and 5) better-/worsethan-expected economic slowdown.

Source: Affin Hwang Research - 25 Jun 2020