We are maintaining our NEUTRAL rating on the Automotive sector. According to data from the Malaysian Automotive Association (MAA), July’s TIV grew merely by 3% MoM while YoY sales plunged by 12% to 60,267 which we believe was to due to the high base in July 2013 (pick-up in sales post-election). As a result, the cumulative TIV growth of 6% previously (YTD June 14) has narrowed to 3% YTD, which is closer to 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 effect as well as the slower consumer spending amid rising living costs. We maintain our MARKET PERFORM ratings on UMW (TP: RM12.25), DRBHCOM (TP: RM2.49), TCHONG (TP: RM5.38) while keeping our UNDERPERFORM rating on MBMR (TP: RM2.92) for now.

July’s TIV inched up 3% MoM but dropped 12% YoY. While the TIV in July inched up 3% MoM on the back of continued aggressive sales campaign by industry players amidst the Hari Raya celebration, YoY, sales plunged by 12% to 60,267 units. We believe this was due to the high base in July 2013 (pick-up sales post-election). As a result, the cumulative TIV growth of 6% previously (YTD June 14) has been narrowed to 3% YTD which is closer to both our and MAA 2014 TIV growth forecasts of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively. Taking a closer look at the YTD passenger marques’ performance; both national marques Perodua and Proton sales remained lacklustre at 113,618 units (-2%) and 74,085 units (-9%), respectively, which we believed was due mainly 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 remained in positive territory with YTD sales of 43,589 (+20%) units and 43,888 units (+57%), respectively, thanks to overwhelming demand received by their new launches (eg. Toyota Vios, Toyota Altis, Honda City and etc) against lower base last year. On the other hand, Nissan’s YTD sales are still capped in negative territory (-18%).

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 maintaining our conservative TIV forecast of 668,900 units (+2% YoY). 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 (e.g. 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 tracked 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 52:48.

Maintain Neutral. We maintain our MARKET PERFORM ratings on UMW (TP: RM12.25), DRBHCOM (TP: RM2.49), TCHONG (TP: RM5.38) while keeping our UNDERPERFORM rating on MBMR (TP: RM3.66). Meanwhile on our retail coverage, we like Berjaya Auto, of which we have a TRADING BUY call (TP: RM2.82) 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 c.3% dividend yield.

Source: Kenanga