A slow month. The total vehicle sales (TIV) in February suffered a massive drop of 21% MoM to 44,976 units largely due to a shorter working month from the long Chinese New Year holidays vis-à-vis busy months such as December 2012 and January 2013. YoY, the total industry volume (TIV) for February grew 7% on the back of relatively stronger sales from the main auto players such as Perodua, Honda and Nissan. The sales of passenger vehicles grew 10% YoY to 40,407 units while the commercial vehicle sales dropped 11% YoY to 4,569 units. The YTD TIV rose 21% YoY to 100,042 units, making up 16% of both ours and the Malaysian Automotive Association's (MAA) 2013 forecast of 641,560 and 640,000 units respectively.

Lower sales for the top five players. Perodua sales volume slid 7% MoM to 14,629 units while the sales of Proton cars weakened by 16% MoM to 10,229 units. For the non-national marques, Toyota, Honda and Nissan passenger car sales declined 21%, 25% and 34% MoM, respectively, but on a YoY basis, Honda's sales actually improved six-fold due to a lower base last year while Nissan's sales grew 61% mainly on the overwhelming response to its Almera model. Meanwhile, we noticed that the sales of some of the other makes (i.e. Audi, Hyundai, KIA and Mazda) has also improved and/or remained stable.

Monthly production fell. Similarly, the total industry production (TIP) for the month also decreased by 7% YoY and 27% MoM to 40,785 units. The production volume for passenger vehicles fell 8% YoY to 36,040 units (-29% MoM) while the total commercial vehicles produced in February also dropped marginally by 1% YoY (16% MoM). For the YTD, the TIP growth was flat YoY, registering a slight increase of 2% to 97,017 units.

Outlook for March.According to MAA's press release, the sales volume for March is expected to be higher MoM due to the longer working month and strong consumer sentiment. Healthy loans approval. Banking statistics from Bank Negara Malaysia (BNM) showed that approval for loans for the purchase of passenger cars was stable for 9M12. However, the loans approved more than doubled MoM in October 2012 to RM7.8b (+133% YoY) and have been increasing steadily since. The strong growth could be attributed to the increase in loans approved by Islamic banks. Total loans approved for January 2013 stood at RM9.0b, a threefold increase YoY (+12% MoM). We believe the health loan approval should continue to support car sales in coming months.

Neutral on the sector. However, we are maintaining our Neutral stance on the auto sector and retaining our 2013 TIV forecast of 641,560 units (2.2% YoY growth). We have replaced our top pick for the sector from UMW (MP, TP: RM12.37) previously, with TCHONG (OP, TP: RM5.60) as UMW's share price has shot up rapidly, thus offering a limited potential upside. On the other hand, TCHONG has been a laggard to its peers and could play catch-up as the company is stepping up its growth plans. At its current price, TCHONG is trading at 11.5x FY13F EPS, which is lower than its peers' average of 15.9x. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM and UMW and an UNDERPERFORM rating on MBMR.

Source: Kenanga