We are maintaining our NEUTRAL rating on the sector and retaining our 2013 TIV forecast of 636,560 units (+1.4% YoY). According to data from the Malaysian Automotive Association (MAA), the total industry volume (TIV) in September improved by 20% YoY and 8% MoM to 54,945 units, reflective of the normalisation from a low base last year (due to the lower passenger vehicle sales) and also helped by the launches of new models (such as Proton Suprima S, Nissan Grand Livina and Volvo V40). On a YTD basis, the 9MCY13 TIV expanded 6% YoY (from 5% in YTD August) to 487,970 units, making up 77% and 76% of both our 2013 TIV forecast of 636,560 and MAA’s forecast of 640,000 units, respectively; thus in line with expectations. We are of the view that the TIV should trend higher in October amid the year-end promotions as well as on new models launching (such as the new Toyota Vios). On the upcoming revised NAP that could be panned out after the Budget 2014, our recent channel checks suggest that it will focus mainly on positioning the country as a regional production hub for hybrid vehicles and EEV. We believe that more manufacturing licenses and prepackaged customised incentives might be offered to attract foreign OEMs to shift their manufacturing capacity to Malaysia. Should this materialise, it will benefit all the auto players in the long-term through partnerships and affiliations, which in turn can be developed into further tie-ups and collaborations.

September’s TIV growth boosted by new models and benefited from a low base effect. The TIV in September rebounded by 20% YoY to 54,945 units, reflective of the normalisation from a low base last year (due to the lower passenger vehicle sales) and also helped by the launch of new models (such as Proton Suprima S, Nissan Grand Livina and Volvo V40). Meanwhile on a MoM basis, TIV increased by 8% on the back of the similar factor as well as helped by a low base in August (recall that August was a shorter working month amid the Hari Raya festival). As a result, the 9MCY13 TIV expanded 6% YoY (from 5% in YTD August) to 487,970 units, making up 77% and 76% of both our 2013 TIV forecasts of 636,560 and MAA’s forecast of 640,000 units, respectively; which is in line with expectations. Similarly, September’s total industry production (TIP) also came in higher at 54,017 (8% YoY, 44% MoM) helped by higher production volume in both passenger vehicles (8% YoY, 45% MoM) as well as commercial vehicles (3% YoY and 34% MoM). YTD, the TIP registered a growth of 3% to 439,868 units.

Strong rebound in national marques sales. Perodua sales increased by 26% YoY and MoM to 17,507 units in September, rebounding from the low base in August coupled with the continuous good response of its S-series variants of its existing Viva, Alza and Myvi models. Similarly, Proton sales also improved by 43% YoY and 26% MoM on the same base effect as well as its successful launching of Proton Suprima S and Proton Saga SV (c.13% or RM5,000 cheaper than the FLX Standard 1.3, the previous entry-level Saga). Positively, these launching have continued to arrest its declining sales trend and sent its YTD sales back to the positive region (from the previous -4% to now +1%). On the other hand, for the non-national marques, Honda and Nissan recorded lower MoM sales by 38% and 16%, respectively, but both the incumbents continued to outperform the auto market sales with YTD sales growth at 59% and 84%, respectively. We believe the weaker sales were due mainly to its market share being clawed by national marques sales.

Outlook. We are of the view that the TIV should trend higher in October amid the year-end promotions as well as new models launching (such as new Toyota Vios). On the upcoming revised NAP that could be panned out after the Budget 2014, our recent channel checks suggest that it 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 materialise, it will benefit 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 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.

Still NEUTRAL on the sector. We are maintaining our NEUTRAL rating on the sector and retaining our 2013 TIV forecast of 636,560 units (+1.4% YoY) despite the YTD (September) growth of 6% YoY as we are anticipating a lower 4Q13 YoY growth due to the normalisation base effect.

Source: Kenanga