We are maintaining our NEUTRAL rating on the Automotive sector and expecting 2014 TIV to record at 661,900 units (+1% YoY). For 2015, although we see headwinds ahead, amidst consumer’s lower disposable income as a result of the GST implementation and rising cost of living, we are still expecting TIV to stay flat at 662,000 units, mainly underpinned by: (i) resilient Malaysian economy on the back of our in-house real GDP growth forecast of 5.1% YoY, and (ii) the normal vehicle replacement for old cars (with the current five million cars on the road aged between 10 and 15 years). While cheaper car prices (with potential savings of c.1-3%) could be seen post the GST implementation, this imminent catalyst could easily be offset by the tighter credit for hire-purchase as well as the rising cost of living. Currency-fluctuation-wise, we view BJAUTO as the apparent winner to the weakening JPY (as c.50% of its total costs are exposed to the currency) while TCHONG will be negatively impacted the most under the weak MYR vs. USD scenario (as 1/3 of the group’s costs exposed to USD). Our Top Pick remained with BJAUTO (OP, TP: RM4.29) for investment merits backed by its: (i) superior growth prospect from low base on the back of strong pipeline of exciting models, (ii) margin's expansion 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%, which could translate into a c.4.1% dividend yield.

Mixed bags in 3QCY14 results. Industry players reported mixed sets of results with BJAUTO being the sole outperformer thanks to the higher-thanexpected EBIT margin which was mainly helped by weaker JPY against MYR. While UMW and MBMR met expectations, TCHONG and DRBHCOM came in below expectations with main culprits being the lower-than-expected vehicle sales coupled with the corroded margins on higher incentives given to push sales and higher A&P expenses amidst the stiff competition (particularly in the B-segment). Post-results, we have cut the earnings estimates for DRBHCOM and TCHONG as well as their target prices. On a macro perspective, concurrently with the recent round of earnings cut, our 2014 TIV forecast has been trimmed to 661,900 units (+1%) from 668,900 units with December TIV forecasted to be at 60,095 units.

YTD Nov14 TIV growth remained flat at +1% YoY (at 601,805 units), still a tad below MAA’s full-year growth forecast of +3.7% YoY (at 680,000 units) despite November’s positive TIV growth (+6% YoY, +2% MoM). Looking at the national marques, while Perodua sales volume remained resilient in November (+24% YoY and 5% MoM), which we believe was helped by the overwhelming demand of Perodua Axia, Proton’s sales performance still remained weak (-11% YoY and 1% MoM). We believe one of the culprits could be due to the recent strong debut in Proton Iriz which has yet to translate into comparable sales, due to the 0% booking fee which gave consumers open option to alternative choices. Meanwhile zooming into the non-national marques, Toyota, Honda and Nissan sales continue to see growth helped by its year-end heavy promotional activities.

We view our December TIV forecast of 60,095 (0% YoY and +7% MoM) to do well, bringing the full-year TIV forecast to 661,900 units. The MoM growth is expected to be driven by: (i) new sales boosted by Perodua Axia, and (ii) aggressive sales campaign. Note that December TIV for the past two-years was also hovering at 60,470-60,493 units. Meanwhile on the earnings side, with the ongoing stiff competition as well as the unfavourable exchange rate, we reckon the earnings growth for automotive companies, especially TCHONG (UP, TP: RM3.00) to be kept in check in 4Q14.

Currency fluctuations - a double edge sword to the automotive players. On the USD front, UMW and TCHONG are more sensitive to the fluctuation of USD vs. MYR as c.1/3 of the group’s costs is dominated in USD. However, the net fluctuation impacts to UMW are relatively immaterial compared to TCHONG as the revenue of its listed subsidiary UMW Oil & Gas (90% derived from USD), will act as a natural hedge. Meanwhile on TCHONG, management noted that a 10 sen change in USD vs MYR will fluctuate its PBT by c.RM60m. We have imputed an average RM3.27-RM3.43/USD in FY2014-FY2015 to the abovementioned companies, to align with our in-house forecast. On the JPY front, BJAUTO is the apparent winner in the weakening of JPY vs. MYR as c.50% of its total costs is exposed to JPY. With the on-going monetary stimulus programme implemented by Bank of Japan, we expect JPY to stay soft. We have imputed an average RM3.00-RM3.05/100JPY in the BJAUTO’s FY15E and FY16E. Based on our sensitivity analysis, every 1% fluctuations in the JPY will have a positive impact to the group’s FY15E-FY16E NPs by 5-7%.

Sector remains NEUTRAL with Berjaya Auto being our Top Pick. We also like DRBHCOM (OP, TP: RM2.30) given its undemanding valuation, which implies an 11x forward PER (which is at 30% discount to the industry forward PER of 15.7x). There are no changes on our MARKET PERFORM calls on both UMW (TP: RM11.60) and MBM (TP: RM3.06). TCHONG (TP: RM3.00), meanwhile, is the only UNDERPERFORM call in the sector due to its rich valuation of 24x FY15 PER with no immediate re-rating catalyst in sight.

Source: Kenanga