We maintain our NEUTRAL rating on the AUTOMOTIVE sector with an unchanged 2015 TIV forecast of 667,000 units (flat growth assumption). According to latest data from the Malaysian Automotive Association (MAA), YTD February’s total industry volume (TIV) stayed flat at 100,992 units as expected, owing to the consumers’ wait-and-see approach in anticipation of lower car prices post GST implementation. For 2015, we see crosswinds ahead amidst lower disposable income as a result of GST implementation and rising living cost. While the silver lining appears to be cheaper car prices (by 1-3%) in some of the marques with effect from 1st April 2015 (as a result of SST being replaced by GST), we do not see it as a strong re-rating catalyst for the sector as it could easily be offset by the rising cost of living. Zooming down to the automotive companies, we see margin erosions as the apparent earnings risk in 1H2015, arising from: (i) heavy discounts given pre-GSTimplementation to reduce old inventories (in avoidance of tax complications), and (ii) high denominated USD costs amidst the weakening of MYR vs. USD. Hence on stock selections, we prefer to stick with auto players that are less vulnerable to the weakening MYR. 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 c.3.5% dividend yield.

A mixed bag of 4QCY14 results. From the five stocks under our coverage, UMW, MBMR and BJAUTO met expectations whereas TCHONG and DRBHCOM came in below expectations. For the underperformers, the main culprits were the higher advertising and promotional expenses coupled with higher-than-expected import cost due to adverse currency fluctuations. Postresults, we have cut our earnings estimates for DRBHCOM and TCHONG, which led to lower target prices with the former downgraded to MP. While there were no major changes to our UMW and MBM earnings assumptions, we have reduced our UMW's TP to RM11.00 from RM11.70 after we ascribed a lower PER on the O&G business due to industry-wide de-rating amidst an uncertain oil price environment. Meanwhile on MBM, we have upgraded its TP from RM3.06 to RM3.52 as we have ascribed a higher targeted 10.0x PER (from 9.0x), which is at its 3-year average forward PER in lieu of its improving earnings outlook.

Feb 2015 TIV came in flat at 50,390 units (-1% YoY and 0% MoM), bringing YTD 2M15 TIV to 100,992 units (0% YoY) which made up 15.1% and 14.9% of our and MAA’s 2015 forecasts of 667,000 units and 680,000 units, respectively. The sluggish sales volume came as no surprise to us as we had already noted in our previous reports that we do not discount the possibility of consumers holding back purchases in anticipation of lower car prices post GST implementation. Looking at the national marques, while Perodua February’s sales volume remained strong (+19% YoY and 16% MoM), which we believe was driven by Perodua Axia and face-lifted Myvi, Proton’s sales remained lacklustre (-23% YoY and -7% MoM) despite attractive discounts offered across its key models. Within the non-national marques, while Toyota gained back its No.2 market share position from Nissan in February thanks to heavy promotional activities, its YTD growth is still capped in the negative territory (-45%), as opposed to Honda (+17%) and Nissan (+6%).

Keeping our 2015 TIV forecast at 667,000 units (flat growth). We see crosswinds ahead amidst lower disposable income as a result of the GST implementation and rising living cost. While the silver lining appears to be cheaper prices in some of the marques (by 1-3% w.e.f 1st April 2015) as a result of SST being replaced by GST, we do not see it as a strong re-rating catalyst for the sector as it could easily be offset by the rising cost of living. For our 2015 TIV forecast, we are still expecting TIV to stay flat at 667,000 units, mainly underpinned by the normal vehicle replacement for old cars (with the current five million cars on the road aged between 10 and 15 years).

Double whammy to auto players’ margins. From our channel-checks, we understand that majority of the automotive companies are rushing to clear their old inventories (in which the Sales and Services Tax have already been paid) through attractive offers in 1QCY15, in avoidance of tax complications post GST implementation. While we view the move as an opportunity for auto players to boost revenue, our concern remained with potential margins erosion (arising from the heavy discounts) that could pose earnings risk to the auto companies’ 1QCY15 results. Meanwhile on the currency side, with the weakening trend of MYR to persist due the cloudy local economy outlook, we see auto players with high denominated USD costs (with the import of CBU vehicles, CKD packs and other components) to see further margins compression pressures. On a closer look, while 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, the net fluctuation impact to UMW is 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 could fluctuate its PBT by as high as c.RM60m. We have imputed an average RM3.50/USD exchange rate for CY2015 for the abovementioned companies. On the JPY front, BJAUTO is the apparent winner of the weakening of JPY vs. MYR as c.50% of its total costs is exposed to JPY. With the ongoing 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 numbers. 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%. 

Source: Kenanga Research - 6 Apr 2015