We are maintaining our NEUTRAL rating on the Automotive sector in the absence of immediate re-rating catalyst coupled with moderate growth expectations. For 2014, although we are not expecting TIV numbers to head south on the assumption of favourable macro factors, the growth rate is seen moderate at 2.0% YoY, translating into TIV of 668,900 units. This is due to rising living cost, which could dampen consumer spending behaviour especially on durable big-ticket items such as cars. Meanwhile on the revised NAP that was announced beginning of the year; while we are mildly positive on the comprehensive policy which aims to further liberalise the sector and resolve the structural issues, we reckon that the fruition will not be seen in the short-term given the gestation period for the sector restructuring. We continue to like TCHONG (TP: RM6.57) given its strong Nissan franchise expansion, and long-term regional growth story. Meanwhile out of our universe coverage, we like Berjaya Auto, of which we have a TRADING BUY call (TP: RM1.92) for our retail product segment with the following investment merits: (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.

4QCY13 results round-up. Results were disappointing with all the four stocks coverage namely UMW, DRBHCOM, TCHONG and MBM delivering results that were below expectations. The main culprits were the: (i) lower-than-expected vehicle sales amidst subsidy rationalisation and (ii) lower margins on higher discounts given amidst the year-end sales campaign as well as stiff competition. Post results, we have trimmed the earnings estimates for all the companies which led to lower TP (ratings maintained for all) mainly on the assumption of lower vehicle sales as well as higher operating costs.

February TIV up 1% MoM and 13% YoY to 50,718 units despite a shorter working month, bucking the weaker trend in January 2014. Meanwhile on YTD basis, cumulative TIV of 100,991 units (+1%) came in within of both our and MAA 2014 TIV forecasts of 668,900 and 670,000, respectively. Taking a closer look in terms of the sales breakdown at the passenger marques segment on a MoM basis, sales for both Proton and Perodua recovered by 10% and 29%, respectively, of which we believe is due to the preferences for more affordable cars amidst rising cost of living. While the overall non-national marques registered pallid sales volume MoM, Toyota sales rebounded by 23% on the back of overwhelming responses of its newly-launched Vios and Altis models. In terms of sales outlook for March 2014, we are expecting TIV to register better MoM sales; a view which concurs with MAA, on the back of a longer working month as well as the introduction of new models such as the new Honda City.

Key trends 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% YoY, achieving TIV of 668,900 units amidst rising living cost, which could dampen the consumer spending behaviour especially for durable big-ticket items such as cars. We believe consumers will be more sensitive to pricing and thus preference may incline towards cheaper car models. Coupled with the ongoing stiff competition, 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. Meanwhile on the revised NAP that was announced beginning of the year, while we are mildly positive on the comprehensive policy which aims to further liberalise the sector and resolve the structural issues, we reckon that the fruition will not be seen in the short-term given the gestation period for the sector restructuring.

Maintain NEUTRAL. In the absence of immediate re-rating catalyst in the pipeline coupled with the moderate growth expectations, we maintain our NEUTRAL rating on the sector with selective buy. TCHONG remains as our only BUY stock as we like its strong Nissan franchise expansion and its long-term regional growth story. Meanwhile, apart from our coverage universe, we also like Berjaya Auto, of which we have 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.

Source: Kenanga