We are maintaining our NEUTRAL rating on the Automotive sector. Despite the YTD August total industry volume (TIV) growth of 5% YoY, we are keeping our 2013 TIV forecast of 636,560 units (+1.4% YoY) as we anticipate the growth pace to slow down in the remaining months due to the high base in 4Q2012 as well as the upcoming subsidy rationalisation that might dampen consumer sentiment. Our recent channel checks suggest that the revised NAP (to be announced in 4Q2013 based on market talk) will focus mainly on positioning the country as a regional production hub for hybrid vehicles and EEV. In view of more manufacturing licenses and pre-packaged customised incentives to be offered to attract the foreign OEMs, we believe it will likely benefit all the auto players over the long-term through partnerships as well as affiliations with foreign car makers. For the upcoming Budget 2014, if GST is implemented, this would be MARGINALLY POSITIVE to the Automotive sector as GST will replace the sales tax (of 10%) and thus lowering On The Road (OTR) car prices marginally. This may potentially lend strength to higher demand, in our view. Nevertheless, the mildly positive catalyst is not enough to compel us to change our NEUTRAL view as we believe the impact could easily be offset by the recent fuel price hike and further subsidies rationalisation plan. We continue to like TCHONG (TP: RM7.50) in view of its undemanding valuation (which is currently trading at 12.5x FY14 PER). TCHONG remains our top pick for the sector as we believe it should deserve a higher valuation given: (i) its potential NP growth averaging c.46% p.a. in FY13E and FY14E; (ii) strong Nissan expansion, and (iii) overwhelming response for its existing models. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM (TP: RM2.69) and UMW (TP: RM13.39) while keeping our UNDERPERFORM rating on MBMR (TP: RM3.66).

2QCY13 results snapshot. Auto industry players generally reported subdued 2QCY13 results, which were dragged down mainly by delayed purchases and also cancellation of bookings by customers in anticipation of lower car prices during the GE period. Out of the four auto companies we covered, only two stocks namely TCHONG and MBM came in within expectations on the back of slightly better than industry car sales. On the other hand, UMW and DRB-Hicom reported weak results, mainly on the back of lower sale of vehicles with market shares clawed by competitors.

Expecting TIV to grow by 1.4% YoY in 2013. Augusts’ TIV registered a drop of 1% YoY or 25% MoM due to the shorter working month in August 2013 as well as the high base in July 2013 (when sales was boosted by aggressive marketing campaigns in conjunction with the Hari Raya festival). As a result, the YTD August TIV growth narrowed to 5% YoY (from 6% in YTD July). We are still keeping our 2013 TIV forecast growth of 1.4% YoY (vs. MAA’s TIV forecast of 2% YoY) as we are expecting sales normalisation for the rest of the year due to the high base in 2H2012 and the upcoming subsidies rationalisation plan that might hurt consumer sentiment. We are keeping our assumption on the sales mix of national and non-national segment at 52:48 for the full year.

Revised NAP to emphasise mainly on Energy Efficient Vehicles (EEV). Our recent channel checks suggest that the revised NAP will focus mainly on positioning the country as a regional production hub for hybrid vehicles and EEV. We believe that more manufacturing licenses and pre-packaged customised incentives might be offered to attract the foreign OEMs to shift their manufacturing capacity to Malaysia. Should this materialised, it will benefits all the auto players in the long-term through partnerships and affiliations, which in turn can be developed into further tie-ups and collaborations. Meanwhile on the issue of expiring tax exemption for hybrid vehicles, we do not discount the possibility of exemption withdrawal for CBU cars as this would be in line with the government aspiration as mentioned above. Note that Honda could continue to enjoy the first mover advantage as it is the only one with hybrid vehicle CKD assembly operations in the country. While the new policy could also look into revising the structural issues such as the triple tax structures on cars, we believe that excise duties will not be reduced given the huge contribution of income (c.RM7bn annually) to the country.

GST implementation to drive OTR car prices lower. For the upcoming Budget 2014 which is slated for 25th Oct, we reckon that the GST issue might be addressed. We are of the view that should GST be implemented, it would be MARGINALLY POSITIVE to the Automotive sector as the GST will replace the existing sales tax (of 10%) which may reduce OTR prices for cars and catalysing higher demand. Nevertheless, this mildly positive catalyst is not compelling enough to prompt a change in our NEUTRAL view on the sector as we believe that the positive impact could be easily offset by the recent fuel price hike and upcoming subsidies rationalisation plan. (Recall that in our sector report published on 20^th September, we highlighted that the correlation coefficient between fuel price changes and TIV growth of c.-0.16 suggested that a hike in fuel price will have a marginal negative impact to the TIV). 

Source: Kenanga