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 April 2014 grew by 12% YoY, resulting in cumulative TIV growth of 4% which was ahead of both our and MAA 2014 TIV growth forecasts of +2%. The robust growth was attributed mainly to the normalisation from the low base last year (which was due to the delayed purchases ahead of the 13th General Election). On our take, we are still keeping our conservative forecast of 668,900 units as we are expecting sales momentum to slow down from 2H14 onwards due to the high base (pick-up in sales post election) as well as the slower consumer spending amid rising living costs. 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. We 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.

April’s TIV registered a robust growth of 12% YoY to record at 58,732 units, a reflection of the normalisation from the low base which was due to the delayed purchases ahead of the 13^th General Election last year. As a result, the cumulative TIV growth of 4% was ahead of both our and MAA 2014 TIV growth forecasts of 2%. Meanwhile, taking a closer look at the YTD passenger marques’ performance; while national marques Proton and Perodua registered pallid sales due to the lack of new model launches, non national marques incumbents, Toyota and Honda both recorded decent sales growth of 44% and 48%, respectively, driven by its new attractive launches (eg. Toyota Vios, Toyota Altis and Honda City.) Meanwhile, Nissan’s YTD sales growth is still capped in negative territory.

Key trends in 2H14. Although the immediate catalysts for the vehicle sales would be (i) attractive new models launches as well as (ii) the assumptions of favourable macro factors such as healthy GDP growth, we are still keeping our conservative TIV forecast of 668,900 units (+2% YoY) as we are expecting sales momentum to slow down from 2H14 onwards due to the high base (pick-up sales post election) as well as the slower consumer spending amid rising cost of living. We believe consumers will be more sensitive to pricing and thus preference may incline towards cheaper car models. Coupled with the ongoing stiff competition, all these could ultimately point 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. We 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