TIV  for  9M12  grew  by  3.3%  y-o-y,  better  than  expected  thanks  to  the  recovery  in Honda's production. We raise our TIV forecast for 2012 to 2.5%, in line with MAA's forecast, driven by Honda and marques with smaller market shares. The boost in numbers  does  not  impact  our  coverage  forecasts  as  Toyota  and  Perodua  sales remain on track. In light of the upcoming 3Q results season, we advise investors to  stay  away  from  autoparts  stocks,  due  to  the  disappointing  sales  from  Proton, but continue to be invested in UMW. Maintain OVERWEIGHT on the auto sector.  
 
Better  than  expected,  thanks  to  Honda.  Upping  forecasts.  Total  industry  volume (TIV)  for  September  was  4.5%  higher  y-o-y  but  contracted  11.8%  m-o-m  as  the  post-Hari  Raya  month  was  seasonall  weaker.  3Q  TIV,  which  would  be  a  more  appropriate measure  to  take  off  the  distortive  impact  from  Hari  Raya,  grew  by  a  stellar  4.1%  y-o-y thanks  to  the  higher-than-normalized  production  from  Honda.  Recall  that  Honda  only recently recovered from flood disruptions. Assuming that production had normalized for Honda  since  early  this  year,  normal  TIV  growth  would  be  1.3%  y-o-y  in  3Q  2012. However,  with  YTD  TIV  already  at  3.3%  y-o-y,  we  deem  the  thus-far  numbers  likely  to surpass  our  conservative  TIV  growth  forecast  of  1.1%  in  2012  as  we  have  highlighted last month. We raise our TIV growth projection to 2.5% from 1.1% in 2012. Our forecast is now in line with that from the Malaysian Automotive Association's (MAA). Despite nudging  up  our  TIV  forecast,  we  maintain  our  sales  projections  for  Toyota  (including Lexus),  Perodua  and  Nissan.  The  more  optimistic  forecasts  were  largely  attributed  to stronger sales from Honda and the other marques with smaller market shares.
 
How the top five marques performed. In 3Q, national automakers Perodua and Proton saw their vehicle sales dropping by 2.6% y-o-y and 12.8% y-o-y respectively, while sales of non-nationals Toyota, Nissan and Honda grew by 6%, 4.6% and 50.7% respectively. On a YTD basis, Toyota (together with Lexus) saw the strongest growth amongst the top five marques, with vehicle sales growing by 17.7%, followed by Perodua at 9.6%.

Excise duties cut in the offing? We do not expect significant market liberalisation from the  upcoming  national  automotive  policy  (NAP)  other  than  efforts  to  make  Malaysia  a production  hub  for  Enhanced  Environmentally  Friendly  Vehicles  (EEV).  Lately,  the Malaysian  Automotive  Institute,  the think tank for Malaysia's automotive sector, has stressed that Malaysia's car ownership costs '  which  include  petrol  costs,  interest financing,  insurance  and  road  tax  '  are  much  more  affordable  than  those  in  Thailand and Indonesia. We believe this is part of its efforts to manage public expectations on the possibility that there may not be any reduction in excise duties, or that the scale of the cut  would  be  far  less  than  expected.  The  price  reduction,  if  implemented,  will  likely trigger  a  drop  in  resale  value  in  the  second-hand  market  given  the  accelerated depreciation impact, which could in turn deter buyers from trading in their used vehicles for new ones. As such, we think a gradual reduction of less than 5% would be a possible scenario.

Earnings outlook and strategy. Proton's disappointing sales q-o-q and y-o-y are likely to  result in a hit on DRB Hicom's earnings and also drag down component makers. Among stocks within our coverage, this does not bode well for MBM given that it relies on Proton for the sales of its airbags through its subsidiary Hirotako though we expect this impact to be cushioned by higher airbag production thanks to the implementation of the dual airbag policy, which became mandatory effective on 1 July. EPMB and Delloyd Ventures will likewise be hit by Proton's production decline as they also depend heavily on Proton. UMW and Tan Chong are expected
to  report  better  results  y-o-y  on  the  back  of  higher  vehicles  sales  and  we  believe  UMW  could  also  register improved q-o-q numbers on higher contributions from its oil and gas and equipments divisions. For earnings exposure,  we  strongly  advise  investors  to  buy  UMW.  Any  retracement in MBM's share price can be an opportunity  to  accumulate  the  stock, although preferably after its results are released. Tan Chong's share price  may  stay  in  an  overhang  for  a  while,  until  we  have  more  visibility  on  what  the  bookings  of  its  Nissan Almera  would  be.  The  launching  of  the  Almera  is  on  schedule  on  30 Nov,  as  is  the  announcement  of  its pricing.

Outlook  for  2013.  Besides  the  upcoming  NAP,  we  expect  the  automotive  sector  to  be  quiet  next  year. Growth would be muted given the lack of new key model launches other than facelifts. We expect TIV to grow 1% in 2013 on the back of GDP growth of 4.9%. 2014 would be the year to look out for due to the anticipated launch of the new Perodua Viva and possibly a new Proton line-up.

OVERWEIGHT.  While  2013  is  expected  to  be  quiet,  we  see  the  market  as  being  forward-looking.  We maintain our OVERWEIGHT call on the auto sector with UMW (FV: RM11.87) and MBM (FV: RM4.76) as top picks. We like UMW for its market dominance via the Toyota and Perodua marques and the turnaround of its oil  and  gas  segment.  Meanwhile,  we  see  a  possible  rerating  for  MBM  as  it  moves  up  the  value  chain  to become an integrated automotive group.

Source: OSK