We are maintaining our NEUTRAL rating on the Automotive sector. According to data from the Malaysian Automotive Association (MAA), the total industry volume (TIV) in June grew 9% YoY, a reflection of the normalisation from the low base (which was due to the wait-and-see attitude adopted by consumers back then on expectations of lower car prices after General Election last year). Meanwhile, the 5% MoM growth was driven by the aggressive sales campaign by industry players amidst pre-Hari Raya festive season. Although the cumulative TIV growth of 6% was ahead of both our and MAA 2014 TIV growth forecasts of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively, we are keeping our conservative forecast as we expect sales momentum to slow down from 2H14 onwards due to the high base in 2H13 (pick-up in sales post election) as well as the slower consumer spending amid rising living costs. We like Berjaya Auto, of which we have a TRADING BUY call (TP: RM2.82) for our retail product segment on 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.

June’s TIV registered a growth of 9% YoY to 58,561 units, a reflection of the normalisation from the low base which was due to the wait and see attitude adopted by consumers previously on expectations of lower car prices after General Election last year. As a result, the cumulative TIV growth of 6% was ahead of both our and MAA 2014 TIV growth forecasts of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively. Meanwhile on MoM basis, the growth of 5% was driven by the aggressive sales campaign by industry players amidst pre-Hari Raya festive season. Taking a closer look at the YTD passenger marques’ performance; for the national marques, both Perodua and Proton sales remained lacklustre at 94,480 units (-2%) and 63,040 units (-3%), respectively. We believe the lacklustre demand was mainly due to rising cost of living faced by its targeted customer base (middle-income car buyers) as well as the lack of new model launching. Meanwhile, for the non-national marques, both Toyota and Honda still remained in positive territory with YTD sales of 37,696 (+28%) units and 37,203 units (+70%), respectively, thanks to overwhelming demand on its respective new launches (eg. Toyota Vios, Toyota Altis, Honda City and etc) against its low base last year. On the other hand, Nissan’s YTD sales are still capped in negative territory.

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 (pick-up sales 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 corrodes the profitability of players with huge exposure of imported CKD in USD), we reckon the earnings growth for our covered 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.

Maintain Neutral. 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.

Source: Kenanga