• Malaysia’s automotive Total Industry Volume (TIV) is expected to recover in 2H20 albeit off a low 1H20 base on cheaper car prices from the Sales and Service tax exemption period. 2020 TIV is still projected to decline 22% yoy.
• Myriad challenges lurk for the sector, but we think the government may step in with additional incentives to ease automakers’ burden.
• We upgrade Sime Darby (TP RM2.69) to BUY while maintaining our BUY rating for UMWH (TP: RM3.10). Upgrade sector to Overweight.

MARII: Pencilling in additional incentives under NAP20, pending approvals

Post our event, we sense that the government could potentially roll out additional incentives, in the form of an enhanced customised incentive via the industrial linkage programme or a possible reversion of the previous open market value methodology to assists the recovery phase for automakers. We gather that MARII is also in the midst of reviving the idea of a voluntary end-of-life vehicle inspection mechanism, which we think would help to address the high car ownership issue in Malaysia.

MAA guiding for a better 2H20 auto outlook, but challenges remain

MAA has recently raised the 2020 TIV forecast to 470k units (-22% yoy; from 400k units estimate previously), following the Penjana Sales & Service Tax (SST) exemptions for vehicles. Moving past 2020, MAA is forecasting 2021-2022E TIV to improve to 550k-600k units respectively, in anticipation of an improvement in domestic spending as the global economy recovers. However, Datuk Aishah warned that: i) economic downturn, ii) weaker consumer and business sentiments, iii) high unemployment rates, iv) stringent loan approvals for purchase of passenger vehicles and v) highly-saturated domestic auto market may impede auto sales growth. Our economics team recently cut their 2020E real GDP growth projection for Malaysia to -4.5% yoy, which has also prompted us to cut our 2020E TIV forecast to 465k units (previous estimate: 485k units).

Encouraging feedback from the two listed companies

Sime Darby (Sime) and UMW Holdings (UMWH) concurred that both automakers are benefitting from the cheaper car prices from the SST exemption in Malaysia. Sime is a good proxy to regional recovery - we anticipate the higher equipment deliveries and parts sales from Australia and China as well as “catch up spending” from aflluent consumers will boost luxury car sales in China and Malaysia. We also like UMWH for its exposure to its 38%-Perodua market dominance and fresh CKD Toyota model launches should aid recovery in 2H20 automotive sales.

Upgrading Sime to BUY, and upgrade Autos to Overweight

We upgrade Sime to a BUY on valuation with a higher SOTP-derived TP of RM2.69, while maintaining our BUY rating for UMWH with a lower SOTP TP of RM3.10. Given the BUY ratings for our large-cap auto stocks, we upgrade the Auto sector to Overweight (from Neutral). Key downside risks: i) economic slowdown; ii) weaker-than-expected TIV sales; and iii) further tightening of auto financing

Source: Affin Hwang Research - 17 Aug 2020