We are maintaining our Neutral rating on the sector and retaining our 2013 total industry volume (TIV) forecast of 641,560 units (+2.2% YoY) despite the decent YTD (May) growth of 6% YoY as we anticipate a lower 2H2013 YoY growth due to the high base of 2H2012. On the upcoming revised National Automotive Policy (NAP) (expected to be 2H2013), we understand that it will focus mainly on positioning the country as a regional hub for hybrid vehicles and Energy Efficient Vehicles (EEV). This should be positive for all the auto players in the long term, especially DRB-Hicom and UMW Holdings as both will benefit from their partnerships and affiliations with the foreign car makers, which can be developed into further tie-ups and collaborations. While the new policy could also look into revising the structural issues such as high duties on cars, we understand that the government will not cut the excise duty. Meanwhile for the other duties namely import duty and sales tax, we believe the quantum of reduction will not be drastic in the short term as it could cause a drastic impact to the eco-system. TCHONG (TP: RM7.50) is our only OUTPERFORM stock as the company is stepping up its growth plans, underpinned by the higher sales of its Nissan new models. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM (TP: RM2.81) and UMW (TP: RM14.07) as well as our UNDERPERFORM rating on MBMR (TP: RM3.69).  

1QCY13 results snapshot.  All the four auto industry players under our coverage namely UMW (MP, TP: 14.07), TCHONG (OP, TP: RM7.50), MBMR (OP, TP: RM3.69) and DRBHCOM (MP, TP: RM2.81) reported results that were within expectations. Noteworthy among them was TCHONG, which outperformed with a robust growth seen at its net profit level QoQ driven by its higher sales volume on the back of the overwhelming response for its new Nissan Almera. On the other hand, while UMW, DRBHCOM and MBMR reported negative PBT QoQ growth rates mainly dragged down by lower margins amid the intensifying competition, their net profits, however, improved QoQ due to lower effective tax rates.

Expecting TIV to grow by 2.2% YoY in 2013.  As expected, May’s TIV registered a drop of 15% YoY and 5% MoM owing to the wait-and-see approach adopted by consumers on expectations of lower car prices after the general election. Nonetheless, the YTD May TIV still remained in the positive territory with a 6% growth. We reckon this was helped by the aggressive advertising and promotional activities coupled with the low base effect in early 2012 (dragged down by Nissan and Honda as a result of their supply-chain  disruptions by the Thailand flood and the implementation of more stringent car loan approval guidelines by the banking industry back in 2012). Going forward, we believe consumer expectations for significant price reductions will gradually moderate amid the recent moves initiated by manufacturers on cost reduction through enhancing car ownership benefits and lesser on-the-road car prices. Although we reckon that the TIV will trend marginally higher MoM in the months of June, July and August amid the pre-Hari Raya sales, we believe that our 2013 TIV forecast of 2.2% YoY (vs. MAA’s TIV forecast at 2% YoY) is reasonable as we believe that 2H2013 YoY growth will normalise due to the high base in 2H2012.

Revised NAP to emphasise mainly on Energy Efficient Vehicles (EEV).  Based on our channel checks, we understand that the revised NAP (expected to be announced in 2H2013) will focus mainly on positioning the country as a regional hub for hybrid vehicles and EEV. This would include measures and incentives to promote the growth of EEV. This should be positive for all the auto players in the long term especially DRB-Hicom (MP, TP: RM2.81) and UMW Holdings (MP, TP: RM14.07) as both will benefit from their partnerships and affiliations with foreign car makers, which can be developed into further tie-ups and collaborations. While the new policy could also look into revising the structural issues such as high duties on cars, we understand that the government will not cut the excise duty. Meanwhile for the other duties namely import duty and sales tax, we believe the quantum of reduction will not be drastic in the short term as it could cause a drastic impact to the eco-system, i.e. a sharp depreciation of the secondary market car values, which would                 cause dealers with existing secondary stocks saddled with huge losses.

Neutral on the sector. We are maintaining our Neutral stance on the auto sector and retaining our 2013 TIV forecast of 641,560 units (+2.2% YoY). TCHONG (TP: RM7.50) is our only OUTPERFORM stock as the company is stepping up its growth plans, underpinned by higher sales of its Nissan new models. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM and UMW as well as our UNDERPERFORM rating on MBMR.

Source: Kenanga