We are maintaining our NEUTRAL rating on the Automotive sector. According to latest data from the Malaysian Automotive Association (MAA), total industry volume (TIV) in December rebounded by 16% MoM due to the normalisation effect from a low base the previous month (which was due to the technical glitches in the mySIKAP registration system) coupled with the aggressive A&P activities and rebates given by distributors. As a result, 2013 TIV grew by 4.5% to 655,793 units; slightly above (by c.2-3%) both our and MAA 2013 TIV forecasts of 636,560 and 640,000, respectively. For 2014, we are not expecting TIV to head south on the assumption of favourable macro factors, nevertheless, we are expecting TIV to grow moderately at 2% to 668,900 units (revised up by 1% from our previous forecast of 660,500 units) amidst rising living cost, which could dampen the consumer spending appetite, especially for durable big-ticket items such as automobiles. On the revised NAP which was announced two days ago, while we lauded the comprehensive policy which aims to further liberalise the sector and resolve the structural issues, we expect the impact to be MILDLY POSITIVE to the non-national car manufacturers given their EEVs technology know-how, which allows them to enjoy incentives for CKD production in Malaysia. All in, we are still expecting a challenging road ahead for the sector given the high penetration rate and maturity of the market. TCHONG remains as our only BUY 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. 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).

December’s TIV rebounded by 16% MoM. While the TIV in December came in flat virtually unchanged YoY to 60,493 units due to the high base effect last year, it rebounded by 16% MoM due to the normalisation from a low base the previous month (which was due to the technical glitches in the mySIKAP system which slowed down vehicle registration process) coupled with the aggressive A&P activities and rebates given by distributors in conjunction with the year-end sales and festive seasons such as Christmas and New Year. As a result, 2013 TIV registered a 4.5% growth to 655,793 units, which was slightly above (by c.2-3%) both our 2013 TIV forecasts of 636,560 and MAA’s forecast of 640,000 units, respectively. On a closer look in terms of the MoM sales breakdown at the passenger marques segment, sales for both Proton and Perodua contracted by 19% and 4% MoM, respectively, which we believe were clawed by non-national marques due to the latter’s aggressive rebates.

Expecting TIV to grow moderately at 2.0% 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 2.0% YoY to achieve TIV of 668,900 units (revised up by 1% from previous forecast of 660,500 units) amidst rising living cost, which could dampen the consumer spending appetite, especially on durable big-ticket items such as automobiles. We believe consumers will be more price sensitive and thus preference may incline towards lower priced cars. Coupled with the ongoing stiff competition, all these are pointing to the trend of continued 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.

NEUTRAL to MILDLY POSITIVE on the revised NAP 2014. On the revised NAP that was announced two days ago, while we lauded the comprehensive policy which aims to further liberalise the sector and resolve the structural issues, we expect the impact to be MILDLY POSITIVE to the non-national car manufacturers given their EEVs technology know-how, which allows them to enjoy incentives for CKD production in Malaysia. We view that the extension of exemption of excise duties and import taxes for CKD EEV will immediately benefit DRBHCOM as its Honda Jazz is the only hybrid vehicle assembled locally. We are also expecting UMW (to produce Camry Hybrid CKD) and TCHONG (to produce Serena Hybrid CKD) to start producing EEVs at their respective plants in conjunction with the issuance of manufacturing license for EEVs for all-segment vehicles. This could buffer the impact on the potential weaker sales for its respective CBU hybrid vehicles (which is at c.6% of total car units for UMW and c.5% of total car units for TCHONG) given the non-extension of the CBU Hybrid duty exemptions. All in, we are still expecting a challenging operating landscape given the high penetration rate and maturity of the market.

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 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