We are maintaining our NEUTRAL rating on the Automotive sector. For the upcoming Budget 2015, we believe there will be more clarity on the Goods and Services Tax (GST) structure which if implemented as planned would be MARGINALLY POSITIVE to the Automotive sector as the 6% GST will replace the existing higher sales tax (of 10%) thus lowering On The Road (OTR) prices for cars. Nevertheless, slightly cheaper car prices may just be a mild positive catalyst as this not compelling enough to prompt a change in our NEUTRAL view. Furthermore, we believe that the positive impact could be easily offset by the upcoming subsidies rationalisation plan as well as the rising cost of living. For the rest of 2014, although the immediate catalysts for vehicle sales would be backed by: (i) new models launches particularly in the affordable A/B segments (such as Perodua Axia and Proton Iriz), we are still keeping our conservative TIV forecast of 668,900 units (+2% YoY) as we are expecting the sales momentum to slow down due to the high base in 2H13 (when sales picked up post election) as well as the slower consumer spending. Our Top Pick for the sector is BJAUTO (OP, TP: RM3.80) with investment merits backed by its superior growth prospect from a low base, sustainable margins as well as a decent yield of 3.5%.

August TIV registered a flat growth YoY but dropped 15% MoM which we believe was due to the high base in July 2014 (which was boosted by aggressive sale in conjunction with the Hari Raya celebration). As a result, the cumulative TIV growth remained at 3% which is close to both our estimate and MAA’s 2014 TIV growth forecasts of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively. Taking a closer look at the YoY passenger marques’ performance segment, Toyota sales soared by 96% due to the low base in Aug 13 (where Vios model run-out), and Honda followed suit (+25%) driven by its flagship Honda City. Meanwhile, Proton and Nissan sales were in negative territory owing to the lack of new model launches this year. MoM, all major marques registered pallid sales with Perodua recording the steepest drop due to Viva model run out.

GST implementation to drive OTR car prices lower. For the upcoming Budget 2015 which is slated to be announced on 10th Oct, we believe there will be more clarity on the Goods and Services Tax (GST) structure. We are of the view that should GST be implemented, it would be MARGINALLY POSITIVE to the Automotive sector as the 6% GST will replace the existing sales tax (of 10%) thus lowering On The Road (OTR) prices for cars. However, while there is a 4% difference between the 6% GST and 10% of the existing sales tax, we reckon that the full 4 percentage points reduction will not be fully reflected on OTR car prices. This is due to the structure of GST which is generally charged on the goods and services consumption at every stage of the supply chain, unlike the current tax structure of which the sales tax is only imposed ex-factory price. Our view is also along the same line with Malaysia Automotive Industry, which expects average car prices to fall by 1%-3% with the implementation of GST. While cheaper car prices could lend strength to spur higher demand, this mildly positive catalyst is not compelling enough to prompt a change in our NEUTRAL view on the sector as we believe that the positive impact could easily be offset by the upcoming subsidies rationalisation plan as well as the rising cost of living.

Sales momentum to slow down. For the rest of 2014, although the immediate catalysts for the vehicle sales would be backed by (i) new models launches particularly in the affordable A/B segments (such as Perodua Axia and Proton Iriz), we are still keeping our conservative TIV forecast of 668,900 units (+2% YoY) as we are expecting sales momentum to slow down 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 corrodes the profitability of players with huge exposure of imported CKD in USD), we reckon the earnings growth for automotive companies this year could be kept in check. Our sales mix assumption of national and non-national segments for 2014 is at 52:48.

Sector remains NEUTRAL with Berjaya Auto being our Top Pick. We maintain our MARKET PERFORM ratings on UMW (TP: RM13.37), MBM (TP: RM3.06), while keeping our UNDERPERFORM rating on TCHONG (TP: RM4.62). While we also have OUTPERFORM ratings on BJAUTO (TP: RM3.80) and DRBHCOM (TP: RM2.49), we have a high conviction BUY call on BJAUTO, with investment merits backed by its : (i) superior growth prospect from low base (+22%-30% bottom-line growth in FY15-FY16) on the back of strong pipeline of exciting models, (ii) sustainable FY15E-FY16E EBIT margins of 11.9%-12.0% on the back of favourable exchange rate (with huge exposure in Yen) as well as lower import duties, and (iii) potential dividend payout of 40% or 11.6 sen based on our FY16E NP of RM224.4m, which could translate into a c.3.5% dividend yield. Note that we started to cover BJAUTO in the space of retail coverage since the beginning of the year. Since our very first Trading Buy call espoused in the retail research report (titled “In Top Gear”) dated 16th January 2014, the current share price has appreciated by c.73%. Even so, we still see a decent total upside potential of 19%, on top of a 3.5% of expected net yield in FY16.

Source: Kenanga