We are maintaining our NEUTRAL rating on the Automotive sector. YTD November TIV registered a 5% growth to 595,300 units, making up 93% of both our 2013 TIV forecasts of 636,560 and MAA’s forecast of 640,000 units, respectively, which is still in line with expectations. On a closer look, November TIV came in lower at -5% MoM and -2% YoY to 52,252 units. While MAA noted that the main culprit for the lower TIV number was the technical glitches in the mySIKAP system which slowed down vehicles’ registration process, we do not discount the possibility of slowing consumer spending amidst the ongoing subsidy rationalisation. For 2014, although we are not expecting TIV numbers to head south on the assumption of favourable macro factors, we are expecting TIV to grow at a moderate pace of 3.8% YoY, achieving TIV of 660,500 units amidst rising living cost, which could dampen the consumer spending behaviour especially on durable big-ticket items such as cars. We believe that the revised NAP (expected to be announced in the mid of January 2014) will focus mainly on positioning the country as a regional production hub for hybrid vehicles and EEV. While we lauded the framework mentioned in the KLIAC 2013, we believe that the implementation will take years to come to fruition, thus prompting us to keep our NEUTRAL rating for now. We continue to like TCHONG (TP: RM7.70) given: (i) its potential NP growth averaging c.53% p.a. in FY13E and FY14E, (ii) strong Nissan franchise expansion, and (iii) long-term regional growth story. Meanwhile, we are maintaining our MARKET PERFORM ratings on DRBHCOM (TP: RM2.62) and UMW (TP: RM13.16) while keeping our UNDERPERFORM rating on MBMR (TP: RM3.66).

November’s TIV down 5% MoM and 2% YoY to 52,252 units. While MAA noted that the main culprit was the technical glitches in the mySIKAP system which slowed down vehicles’ registration process, we do not discount the possibility of slower consumer spending amidst the ongoing subsidy rationalisation. Taking a closer look in terms of the sales breakdown at the passenger marques segment, both Proton and Perodua’s sales contracted by 29% and 4% MoM, respectively, of which we believe that both their market shares were clawed by non-national marques’ due to the latter’s aggressive rebates. Although YTD November TIV of 595,300 units (+5%) still came in within both of our and MAA 2013 TIV forecasts of 636,560 and 640,000, respectively, we reckon that December TIV (possibly at 50k) could come in slightly above our expectation of 41,260 likely on the back of aggressive A&P and rebates activities by distributors to achieve their year-end sales targets.

Expecting TIV to grow by moderate pace at 3.8% YoY in 2014. For 2014, although we are not expecting TIV to head south on the assumption of favourable macro factors such as healthy GDP growth and friendly car loans financing, we are expecting TIV to grow at a moderate pace by 3.8% YoY (YTD 5% growth), achieving TIV of 660,500 units amidst rising living cost, which could dampen the consumer spending behaviour especially on durable big-ticket items such as cars. We believe consumers will be more price sensitive and thus preference may incline towards cheaper car models. Coupled with the ongoing stiff competition, all these are pointing to the trend of continual margin erosion for the automotive players. In terms of sales breakdown, we believe the non-national segment will continue to gain traction on the assumption of more CKD Energy Efficient Vehicles (EEV) being introduced in conjunction with the Government’s initiatives in promoting Malaysia as the EEV regional hub. Our sales mix assumption of national and non-national segments for 2014 is at 52:48.

Revised NAP to emphasise mainly on Energy Efficient Vehicles (EEV). On the upcoming revised NAP that will be announced mid-Jan 2014, we are expecting the policy to entail on: (i) enhancing the competitiveness of the Malaysian automotive industry through resolution of structural issues and (ii) making Malaysia the regional hub for EEV with high technology uptake among industry players for domestic and regional and international exports. We believe a comprehensive set of potential fiscal incentives, duty exemptions (eg. extension of tax exemption for CKD Hybrid Vehicles), customised training and R&D grant would be introduced to promote the set-up of assembly plant for hybrid vehicles in Malaysia. UMW and Tan Chong could see the set-up of new green plant post announcement. While we also do not discount the possibility of End-of-Life of Vehicle programme for old cars to be introduced in conjunction with the announcement, we believe that the policy will be more inclined towards mandatory inspection instead of a scrapping policy. All in, we do not expect the revised NAP to be the immediate rerating catalyst for the sector as the initiatives will take several years to come to fruition.

Maintain NEUTRAL. In the absence of immediate re-rating catalyst in the pipeline coupled with the moderate growth expectation, we maintain our NEUTRAL rating on the sector with selective buy. TCHONG remains as our only BUY stock as we like (i) its potential NP growth averaging c.53% p.a. in FY13E and FY14E, (ii) the strong Nissan franchise expansion, and (iii) its long-term regional growth story.

Source: Kenanga