We maintain our NEUTRAL rating on the Automotive sector. According to the latest data from Malaysian Automotive Association (MAA), total industry volume (TIV) in January declined 22% MoM. While the weaker January TIV is a norm due to the high base effect in December 2014 (where aggressive bookings were seen amidst the heavy discounts given by auto companies), the slowing trend in TIV sales is apparent, with a mere 1% growth YoY even from a low base of weak Jan-14 TIV sales. Hence, we do not discount the possibility of a ‘wait-and-see’ approach among consumers in anticipation of lower car prices post GST implementation. On the upcoming automotive companies’ 4Q14 results announcement, we see earnings risks (especially for TCHONG), which could potentially be dragged down by thinner margins on aggressive A&P activities as well as the adverse currency fluctuations. We leave our earnings forecasts unchanged for all the auto companies, pending results announcement by end of this month. On stock selection, we prefer to stick with auto players which are less vulnerable to the weakening MYR. Our Top Pick remained 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 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 decent 3.8% dividend yield.

Perodua, the outperformer of the month, registered a robust TIV growth of 33% YoY on the back of strong sales of its new flagship vehicle, Perodua Axia. On the other hand, Proton sales remained pedestrian (-9%) despite the new launching of Proton Iriz. On the non-national marques segment, Honda and Nissan sales improved by 2% and 6%, respectively, on the back of heavy promotional activities for its flagship B-segment cars. Toyota, on the other hand, lagged, with its sales volume dropping by 43% YoY, sending its market share down to 6.1% (-4.6ppts).

Expecting TIV to stay flat at 667,000 units in 2015. For 2015, although we see headwinds ahead amidst lower disposable income as a result of the GST implementation and rising living cost, we are still expecting TIV to stay flat at 667,000 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 are possible (with potential savings of c.1-3%) post GST implementation, we do not discount the possibility of it being offset by price hike from auto companies (especially those with high USD exposure), to adjust for the higher cost of CKD kits.

Adverse currency fluctuations to crimp margins of Automotive players. On the USD front, UMW and TCHONG are more sensitive to the fluctuation of USD vs. MYR as c.1/3 of their costs is dominated in USD. However, the net fluctuation impact to UMW are less severe compared to TCHONG as its 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 affect its PBT by c.RM60m. We have imputed an average RM3.27-RM3.43/USD in FY2014-FY2015 for the abovementioned companies, to align with our in-house forecast. On the JPY front, BJAUTO is the apparent winner in the soft JPY trend as c.50% of its total costs is exposed to JPY. We have imputed an average RM3.00-RM3.05/100JPY in BJAUTO’s FY15E and FY16E numbers. Based on our sensitivity analysis, every 1% fluctuations in the JPY will impact the group’s FY15E-FY16E NPs by 5%. On the upcoming automotive companies’ 4Q14 results announcement, we expect to see earnings downside risks (especially TCHONG) in lieu of the aggressive A&P activities as well as the adverse currency fluctuations. We leave our earnings forecasts unchanged for all the auto companies, pending results announcement by end of this month.

Sector remains NEUTRAL with Berjaya Auto being our Top Pick. We still see upside on DRBHCOM (OP, TP: RM2.30) given its undemanding valuation, which implies 11.8x forward PER (which is at 14% discount to the industry forward PER of 13.8x). There are no changes to our MARKET PERFORM call on both UMW (TP: RM11.60) and MBM (TP: RM3.06). TCHONG (TP: RM3.00), meanwhile, is the only UNDERPERFORM in the sector due to its rich valuation of 16x FY15E PER with no immediate re-rating catalyst in sight.

Source: Kenanga