We are maintaining our NEUTRAL rating on the Automotive sector. According to data from the Malaysian Automotive Association (MAA), although October’s TIV rebounded by 13% MoM to 54,187 units mainly on the back of more Perodua Axia deliveries, YoY sales dropped by 2% which we believe was due to the cost push inflationary factor as well as the stricter requirements on hire purchase loan applications. Although the cumulative TIV growth of 1% is already below both our and MAA’s 2014 TIV growth forecast of 668,900 units (+2.0%) and 680,000 (+3.7%), respectively, we expect 4Q14 TIV will rebound by +10% QoQ (from 3Q14 TIV:159,163 units) or +3% YoY (from 4Q13 TIV: 169,282 units) to 175k, making up to our conservative 2014 TIV forecast of 668,900 units which we believe would be driven by: (i) new sales boosted by Perodua Axia and (ii) aggressive year-end sales campaign by the auto distributors in 4Q14 as the final quarter is typically a time window to meet year-end targets. We leave our Auto companies’ FY14-FY15 earnings forecasts as well as target prices unchanged for now, pending their upcoming 3QCY14 results release. We reiterate our MARKET PERFORM ratings on UMW (TP: RM13.37), MBM (TP: RM3.06), while keeping our UNDERPERFORM rating on TCHONG (TP: RM4.62). While having OUTPERFORM ratings on BJAUTO (TP: RM3.80) and DRBHCOM (TP: RM2.49), we also 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 3.4%.

October TIV rebounded 13% MoM driven by Perodua (+46%) and Nissan (+25%) in the passenger marques’ segment. For Perodua, we understand that the strong preliminary orders for Perodua Axia in September had successfully translated into sales in October due to its attractive features and price affordability. Meanwhile, Nissan sales were helped by its heavy promotional activities as well as the normalisation of low base effect. On the other hand, taking a closer look at the YoY passenger marques’ performance, decent gains contributed by Perodua (+14%) and Honda (+59%, driven by its flagship Honda City) was negated by weaker sales in Proton (-37%). Although Proton Iriz had made its debut with strong preliminary orders of 17,000 in September, we believe it did not translate into strong sales due to the 0% booking fee which gave consumers open option to alternative choices.

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 which we believe would be driven by: (i)new sales boosted by Perodua Axia (with monthly targeted sales of 7.5k), 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 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), this quarter could be kept in check.

Budget 2015 generally NEUTRAL to the sector; GST implementation to marginally drive OTR (on the road) car prices lower. Recall on the Budget 2015 announcement, while 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 beneficiary for the companies under our coverage. Meanwhile on the GST implementation in April 2015, with the 6% GST set to replace the existing higher sales tax (of 10%), we see possibility of slight savings (1-3%, along the same expectation with Malaysia Automotive Industry) for the OTR car prices. Nevertheless, we view that the slightly cheaper car prices may just be a mild positive catalyst as these could be easily offset by the ongoing subsidies rationalisation plan as well as the rising cost of living.

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 having an OUTPERFORM ratings on BJAUTO (TP: RM3.80) and DRBHCOM (TP: RM2.49), we also 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 FY15EFY16E) 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.3.4% dividend yield.

Source: Kenanga