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 January declined by 17% MoM. While media press attributed the main culprit to the high base effect in December 2013 for aggressive bookings concluded amidst the heavy discounts offered during the month, we do not discount the possibility of cost push inflationary factor that exacerbated the already slowing consumer spending, which also explained the YoY declining sales by 9%. For 2014, while we are not expecting TIV to head south on the assumption of favourable macro factors, nevertheless, we are expecting TIV to only grow moderately at 2% to 668,900 units amidst rising living cost, which could dampen the consumer spending appetite, especially for 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 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. Out of our universe coverage, we like Berjaya Auto, which has a Trading Buy call (TP: RM1.92) for our retail product segment with investment merits backed by its: (i) superior growth prospect from low base (+25% bottomline growth in FY15) on the back of strong pipeline of exciting models, (ii) potential EEV qualified models, which allow it to enjoy incremental excise duty rebates which in turn enables competitive pricing against other players, and (iii) targeted dividend payout policy (DPR) of up to 40% or 6.4 sen based on our FY15E NP of RM128m, which could translate into a c.4% dividend yield.

January’s TIV declined by 17% MoM to 50,273 units. While media press attributed the main culprit to the high base effect in December 2013 for aggressive bookings concluded amidst the heavy discounts given by auto companies during the month, we do not discount the possibility of cost push inflationary factor that exacerbated the already slowing consumer spending, which also explained the YoY declining sales by 9%. On a closer look at the passenger marques MoM performance, incumbents namely Perodua, Toyota and Honda, registered lower sales with Proton being the only star performer with a sales growth of 10% likely driven by its Proton Suprima S and Proton Saga SV (c.13% or RM5,000 cheaper than the FLX Standard 1.3, the previous entry-level Saga). Meanwhile on a YoY basis, Toyota and Honda sales rebounded by grabbing market share from the national marques on the back of its attractive pipeline of new models. On the other hand, Nissan sales dropped by 21% given the high base in January 2013 whereby its previous sales were boosted by its Nissan Almera models.

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 only grow at a moderate pace, by 2.0% YoY to achieve a TIV of 668,900 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 an EEV regional hub. Our sales mix assumption of national and non-national segments for 2014 is at 52:48.

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. We have a Trading Buy on Berjaya Auto (TP: RM1.92) for our retail product segment with investment merits backed by its: (i) superior growth prospect from low base (+25% bottom-line growth in FY15) on the back of strong pipeline of exciting models, (ii) potential EEV qualified models, which allow it to enjoy incremental excise duty rebates which in turn enable competitive pricing against other players, and (iii) targeted dividend payout policy (DPR) of up to 40% or 6.4 sen based on our FY15E NP of RM128m, which could translate into a c.4% dividend yield.

Source: Kenanga