We are maintaining our NEUTRAL rating on the Automotive sector. According to latest data from the Malaysian Automotive Association (MAA), total industry volume (TIV) in December improved by 7% YoY and 17% MoM driven by: (i) aggressive A&P activities and (ii) heavy rebates offered by distributors amidst year-end sales in conjunction with Christmas and New Year celebrations. As a result, 2014 TIV concluded the year with a 2% growth to register at 666,465 units. While 2014 TIV was generally in line with our 2014 TIV forecasts of 661,900 (with a mere deviation of +0.6%), it came in below MAA’s bullish forecast of 680,000 units (deviation of -2%). For 2015, despite the headwinds in the Malaysia economy front, we are still expecting TIV to stay flat at 667,000 units (revised up by 0.7% from previous forecast of 662,000 units post adjustment) underpinned by the normal vehicle replacement for old cars (with the current five million cars on the road aged between 10 and 15 years). Meanwhile, on stock selections, we prefer to stick with auto players which are less vulnerable to the weakening MYR. Our Top Pick remains BJAUTO (OP, TP: RM4.29) for investment merits backed by its: (i) superior growth prospect from a 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% dividend yield.

Toyota and Honda being the outperformers for the year. Looking at the passenger marques segment, while Proton and Nissan registered decent monthly and yearly growth in the month of December, both remained as the underperformers for 2014 with YTD TIV of -17% and -13%, respectively. We believe the main culprits were the absence of attractive new models launching, which caused thier market shares being clawed by competitors. On the other hand, Perodua’s sales volume closed flat (at 0%), with decent sales in Perodua Axia cushioning the shortfall in 9MFY14. Meanwhile, Toyota and Honda outperformed, underpinned by its flagship B-segments cars such as Toyota Vios and Honda City.

Expecting TIV to stay flat at 667,000 units in 2015. For 2015, although we see headwinds ahead amidst consumer lower disposable income as a result of the GST implementation and rising cost of living, we are still expecting TIV to stay flat at 667,000 units (revised up by 0.7% from previous forecast of 662,000 units post adjustment), 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 fluctuations - a double edge sword to the automotive players. With the weakening trend of MYR to persist in the cloudy local economy outlook, we see selective plays as especially important given the huge foreign currencies exposure (with the import of CBU vehicles, CKD packs and other components) in automotive companies. 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%.

Sector remains NEUTRAL with Berjaya Auto being our Top Pick. We also like DRBHCOM (OP, TP: RM2.30) given its undemanding valuation, which implies 10.4x forward PER (which is at 29% discount to the industry forward PER of 14.7x). 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 22x FY15 PER with no immediate re-rating catalyst in sight.

Source: Kenanga