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 March 2014 rebounded by 16% MoM mainly on the back of new models deliveries as well as the longer working month. On a closer look in terms of sales breakdown, Toyota once again took the lead in the incumbent space, which seen its sales grew by 22% MoM and 35% YoY on the back of the overwhelming responses for its newly launched Vios and Altis. For 2014, we are not expecting TIV to head south due to: (i) attractive new models launches as well as (ii) the assumption of favourable macro factors. Nevertheless, we are expecting TIV to 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. TCHONG (TP: RM6.57) remains as our only BUY 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, under review) 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.3% dividend yield.

March’s TIV rebounded by 16% MoM to register at 58,919 units on the back of deliveries of new models as well as the longer working month. Meanwhile on YTD basis, cumulative TIV of 159,910 (+1%) came in within both our and MAA 2014 TIV forecasts of 668,900 and 670,000 units, respectively. On a closer look at the passenger marques’ MoM performance, incumbents namely Perodua, Proton, Toyota, Honda and Nissan all registered double-digit growth with Toyota taking the lead which gained by 22% driven by the overwhelming responses from its newly launched Vios and Altis. Meanwhile on YTD basis, Toyota and Honda sales registered solid growths of 36% and 30%, respectively, grabbing market share from the national marques with its attractive pipeline of new models. On the other hand, Nissan sales dropped 19% given the high base in 2013 whereby its previous sales were boosted by its Nissan Almera models.

Key trends in 2014. For 2014, although we are not expecting TIV to head south due to: (i) attractive new models launches as well as (ii) 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. Rising living cost 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 (TP: RM6.52) 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, under review) 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.3% dividend yield.

Source: Kenanga