We are maintaining our NEUTRAL rating on the Automotive sector with moderate sales growth expectations. Although we see more attractive new models launches in the pipeline, we are keeping our conservative forecast of 668,900 units, which implies a 2% growth YoY as we expect sales momentum to slow down from 2H14 onwards due to the high base effect in 2H13 (pick-up in sales post election) as well as the slower consumer spending amid rising living costs. We reckon the earnings growth for automotive companies under our coverage this year could be kept in check with margin erosion seen amid the ongoing stiff competition as well as the unfavourable exchange rate (eg. strengthening of USD vs. MYR, which corrode the profitability of those companies with huge exposure of imported CKD in USD). Meanwhile, on the revised NAP that was announced beginning of the year, while we are mildly positive on the comprehensive policy which will further liberalise the sector and resolve the structural issues, we reckon that any fruition will not be seen in the short-term given the gestation period for the sector restructuring. We like Berjaya Auto, of which we have a TRADING BUY call (TP: RM2.82) for our retail product segment with investment merits backed by its: (i) superior growth prospect from low base (+19% bottomline growth in FY15) on the back of strong pipeline of exciting models, (ii) sustainable EBIT margin of 11.2% on the back of favourable exchange rate (with huge exposure in Yen) as well as lower import duties, and (iii) targeted dividend payout policy (DPR) of up to 40% or 8.7 sen based on our FY15E NP of RM168m, which could translate into a c.4% dividend yield.

1QCY14 results round-up. Industry players generally reported weak results that underperformed expectations. The main culprits were: (i) lower-than-expected vehicle sales amidst subsidy rationalisation and (ii) lower margins on higher discounts given amidst stiff competition. Post results, we have trimmed earnings estimates of most of companies (except for UMW) which led to lower TP (ratings maintained for all except for TCHONG with a downgraded MP rating) mainly on the assumption of lower vehicle sales as well as higher operating costs.

May TIV registered a robust growth of 13% YoY to record at 55,939 units, which was a reflection of the normalisation from the low base due to the delayed purchases on expectation of lower car prices during the period up to the General Election last year. As a result, the cumulative TIV growth of 6% was ahead of both our estimate and MAA’s 2014 TIV growth forecasts of 2%. Taking a closer look at the YTD passenger marques’ performance segment, Toyota and Honda both continue to outperform with decent sales growth recorded at 37% and 60%, respectively, on the back of new attractive launches (eg. Toyota Vios, Toyota Altis and Honda City). Meanwhile, Perodua and Proton sales growth are still capped in negative territory owing to the lack of new model launches. In terms of sales outlook for June 2014, we concurred with MAA’s view that sales could maintain at the current momentum given the consumers’ preference to wait for Hari Raya’s promotions.

Sales momentum to slow down 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 in 2H13 (when sales picked up post election) as well as the slower consumer spending amid rising cost of living. On the earnings side, with the ongoing stiff competition (which triggers more aggressive discount and higher marketing costs) as well as the unfavourable exchange rate (eg. strengthening of USD vs. MYR, which corrode the profitability of those companies with huge exposure of imported CKD in USD), we reckon the earnings growth for automotive companies this year could be kept in check. 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.

Source: Kenanga