• The Malaysian government announced sales tax exemption extension for new vehicles by another 6 months, until 30 June 2021.
• While this positive surprise will likely provide continued support to car sales, additional demand may be more modest, in our view, considering i) 2020 sales has a high element of sales brought forward and ii) challenging macro environment still hurting discretionary consumption.
• All in, we lift our 2021E TIV forecast slightly to 540k (+9.1% yoy) from 520k previously. Maintain NEUTRAL sector rating.

Sales tax exemption in place until 30 June 2021

The Ministry of Finance announced the extension of sales tax exemption for new vehicles by another 6 months to 30 June 2021. Recall, under the Penjana economic stimulus, the government had previously offered a sales tax exemption of 100% on Complete Knocked Down (CKD) vehicles and 50% on Complete Built Up (CBU) vehicles from 15 June – 31 Dec 2020.

Positive for auto players heading into 2021

In part due to sales tax exemption and promotional campaigns, auto players had overall reported commendable TIV at 280k (+11% yoy) for the period July-Nov 2020, against same period last year July-Nov 2019 of 253k unit sales. In particular, national car makers Perodua and Proton stood out, recording double digit yoy sales growth each month since the lifting of lockdown in May 2020. Broadly, we foresee the extension of sales tax exemption to benefit automakers across the board, as car prices are set to remain lower by c.3-6% going for 1H21.

Raising 2021E TIV to 540k

In view of the latest development, we raise slightly our TIV forecast for 2021E to 540k (+9.1% yoy) from 520k. This largely factors in higher unit sales across most marquees. While the tax exemption should provide a much-needed support to car demand, we remain cognizant of the challenging macro-backdrop (i.e. high unemployment and lower disposable income) amidst Covid-19 which could continue to hurt pockets of discretionary consumption and thereby suppressing purchases of big-ticket items. Additionally, as this was a surprise announcement, incremental demand may be more modest this time around, given that sales would likely have already been brought forward in 2H20.

Maintain sector NEUTRAL

We remain Neutral on the sector. MBM Resources is our relative preference in the sector, riding on 22.6%-owned Perodua’s leadership and having a strong balance sheet (net cash of RM157m; or RM0.40 sen/share) to withstand any potential downturn. Up/downside risks could come from: i) loosening/tightening of auto financing for car buyers; ii) fluctuation of RM vs US$/JPY; and iii) a greater-thanexpected pickup/slowdown in the economy.

Source: Affin Hwang Research - 30 Dec 2020