We view the sector cautiously as we anticipate a vibrant yet competitive environment for the local auto sector—with the entry of new players and brands in the market. For the coming 2Q13, we find that it will be more difficult to gauge this quarter’s sales performance (which normally picks up as compared to 1Q) as consumers may defer their purchases this round pending the outcome of the upcoming general election. Re-rating catalysts for the auto companies are also limited as most of the good news has already been priced in. As sales growth is expected to be subdued due to the already saturated market, potential re-rating catalysts may arise only from the companies’ other divisions such as vehicle assembly and/or manufacturing. Maintain NEUTRAL.

Mixed 4Q12 results. The automotive companies under our coverage posted a mixed set of results with UMW (MP; TP: RM12.37) and TCHONG’s (OP; TP: RM5.60) results meeting our expectations while MBMR (MP; TP: RM3.35) and DRB’s (MP; TP: RM2.70) results were lower than expected. On a quarterly basis, the companies’ 4Q12 earnings (excluding DRB) were higher as a result of their aggressive promotional activities to clear inventory at the end of the year. This, however, led to a competitive pricing environment, which caused profit margins to suffer. In contrast, DRB’s automotive contribution was lower due to the poor sales from Proton, which in turn dragged down the contribution from its auto component makers.

Competitive playing ground. The local auto players are likely to face greater competitions with the increase of new players in the market. Already, we have seen a shift in the local market share for the national and non-national car makers alike. Based on data released by the Malaysian Automotive Associations (MAA), Proton’s market share has dropped by 4ppt to 26% in 2012 from 30% in 2011 even though it retained its No.2 position. In contrast, Toyota, Hyundai, Kia, Volkswagen, Audi, BMW and Audi’s shares have risen significantly in the past one year through the sales of new and improved models.

All eyes on the General Election. Based on our observation, vehicle sales normally pick up in 2Q as 1Q has shorter working days due in part to the Chinese New Year holidays. However, for this coming 2Q13, we find it more difficult to gauge the quarter’s sales performance as consumers may defer purchases pending the outcome of the upcoming general election. In our view, the revised National Automotive Policy (NAP) is likely to be revealed only after the general election. Among others, the revised NAP may see the introduction of more incentives to auto assemblers and manufacturers to produce more Energy Efficient Vehicles (EEV) in Malaysia. This will benefit DRBHCOM, a franchise holder for Honda Insight, Civic Hybrid and Jazz Hybrid, and UMW, the franchise holder for Toyota Prius, Prius C and Lexus CT200h.

Weak Yen, stronger earnings. The Japanese Yen has weakened by 21% against the Ringgit since end-September 2012 (from JPY3.9662/RM to JPY3.2785/RM). MBM Resources’ (MBMR) associates are beneficiaries of the weaker Yen as 20% of Perodua’s costs and almost 100% that of Hino are denominated in JPY.

Limited re-rating catalysts. We believe the re-rating catalysts for the auto companies are limited as most news has been priced in. As sales growth is expected to be subdued due to the already saturated market, potential re-rating catalysts may arise from the companies’ other divisions such as vehicle assembly and/or manufacturing. One such example is UMW’s impending listing of its oil and gas division.

Neutral on the sector. We maintain our Neutral stance on the auto sector and retain our 2013 TIV forecast of 641,560 units (2.2% growth). The growth will be supported by new and upgraded models from Perodua, Proton, Toyota, Honda and Nissan, to name a few. We have selected TCHONG (OP, TP: RM5.60) as our top pick for the sector for 2Q13 as it 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, the stock is trading at 12.1x FY13F EPS, which is lower than its peers’ average of 15.7x. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM and UMW and an UNDERPERFORM rating on MBMR.

Source: Kenanga