We are maintaining our NEUTRAL rating on the Automotive sector. According to data from the Malaysian Automotive Association (MAA), September’s TIV plunged by 7% to 47,771 units MoM. We believe this was due to the consumers’ wait-and-see attitude in anticipation of coming launches of new national cars and expectations of ‘carrots’ in the then yet to be anounced Budget 2015. We also do not discount the cost push inflationary factor that exacerbated the already slowing consumer spending, which could help explain the YoY declining sales of 13%. Although the cumulative TIV growth of 1% is already below both our estimate and MAA’s 2014 TIV growth forecast of 668,900 units (+2.0%) and 680,000 (+3.7%) respectively, we expect 4Q14 TIV to rebound by +10% QoQ (from 3Q14 TIV: 159,163 units) or +3% YoY (from 4Q13 TIV: 169,282 units) to 175k, making up our conservative 2014 TIV forecast of 668,900 units which we believe would be driven by: (i) new sales booster from both Proton Iriz and Perodua Axia and (ii) aggressive sales campaign by the auto distributors where 4Q14 is typically a period to meet their year-end targets. 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 rating on BJAUTO (TP: RM3.80) and DRBHCOM (TP: RM2.49), we have a high conviction call on BJAUTO, with investment merits backed by its superior growth prospect from a low base, sustainable margins as well as a decent dividend yield of 3.7%.

September TIV dropped 7% MoM to 47,771 units. While MAA attributed the drop to the consumers’ wait-and-see attitude in anticipation of the launches of national cars Perodua Axia and Proton Iriz, we also do not discount the possibility of: (i) consumers’ wait-and-see approach while awaiting for possible ‘carrots’ in the then yet to be announced Budget 2015 and (ii) the cost push inflationary factor that exacerbated the already slowing consumer spending, which also explained the YoY declining sales by 13%. As a result, the cumulative TIV growth (to 492,305 units) compressed to 1% (from 3% YTD Aug14) which is already below of both our estimate and MAA’s 2014 TIV growth forecast of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively. Taking a closer look at the YoY passenger marques’ performance segment, Proton and Perodua both dropped by 46% and 31%, respectively. Meanwhile, Toyota sales soared by 75% due to the low base in Sep13 (where Vios model run-out), with Honda following suit (+86%) driven by its flagship Honda City. On the other hand, Nissan sales were in negative territory owing to the lack of new model launches this year.

4Q14 TIV to reach c.175k. We expect 4Q14 TIV to come in at c.175k (+10% QoQ from 3Q14 TIV: 159,163 units or +3% YoY from 4Q13 TIV: 169,282 units), making up our conservative 2014 TIV forecast of 668,900 units as we believe it will be driven by: (i) new sales boosted by both Proton Iriz and Perodua Axia (both had recently made debuted with strong preliminary orders of 17,000 bookings and 13,500, respectively, prior the official launch date, with monthly targeted sales of 5k (Proton Iriz) and 7.5k (Perodua Axia) and (ii) aggressive sales campaign by the auto distributors where 4Q14 is typically a period to meet their year-end targets. Meanwhile 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 especially TCHONG (UP, TP: RM4.62) in this quarter could be kept in check.

Budget 2015 generally NEUTRAL; GST implementation to marginally drive OTR car prices lower. Recall that in the Budget 2015 announcement, although there is a Sustainable Mobility Fund of RM70m will be established under SME Bank to help develop the electric vehicle manufacturing industry in Malaysia, there are no clear-cut beneficiaries under our coverage. Meanwhile, on the GST implementation in April 2015, with the 6% GST replacing the existing higher sales tax (of 10%), we see possibility of slight savings (1-3%, inline with the same expectation of Malaysia Automotive Industry) on the On-The-Road car prices. Nevertheless, we view that the slightly cheaper car prices may just be a mildly positive catalyst as it couldmeasily be offset by the ongoing subsidies rationalisation plan as well as the rising cost of living.

Sector remains NEUTRAL with Berjaya Auto as our Top Pick. We maintain our MARKET PERFORM rating 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% bottomline growth in FY15-FY16) on the back of strong pipeline of exciting models, (ii) sustainable FY15E-FY16E EBIT margins of 11.9%-12.0%, respectively, 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.3.7% dividend yield.

Source: Kenanga