We maintain our NEUTRAL rating on the Automotive sector. According to the latest data from Malaysian Automotive Association (MAA), total industry volume (TIV) in March rebounded by 34% MoM. Although the strong TIV numbers appear to be the highest monthly TIV achieved since July 2013, we believe the stellar performance was only a watershed event as we believe it was mainly boosted by the attractive offers and incentives to clear stocks prior to the implementation of GST, in order to avoid tax complications. We see implications of further margins erosions arising from the heavy discounts that could post earnings risk to the auto companies’ 1QCY15 results. On stock selection, as the trend of weak MYR vs USD still persists amid the cloudy local economy outlook, we prefer to stick with auto players which are: (i) less vulnerable to the unfavourable currency translation, and (ii) have targeted customer base in the middle-income to high-income bracket that are less sensitive to the rising cost of living. 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 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 3.3% dividend yield.

March 15 TIV came in strongly at 67,314 units (+14% YoY and +34% MoM), bringing YTD 3M15 TIV to 168,306 units (+5% YoY) which made up 25.2% and 24.8 % of our and MAA’s 2015 forecasts of 667,000 units (flat growth assumption) and 680,000 units (+2% YoY), respectively. Although the strong TIV numbers appeared to be the highest monthly TIV achieved since July 2013, we believe the stellar momentum was only a watershed event as we believe it was mainly boosted by the attractive offers and incentives given by car companies to clear stock prior to the implementation of GST, in avoidance of tax complications. Looking at the national marques, while Proton sales rebounded by a stellar MoM growth of 28% in March, its YTD sales is still capped in the negative territory (- 15%) as opposed to Perodua (+30%). Within the major non-national passenger marques, Honda was crowned as the best sales performer across monthly, yearly and YTD basis, which we believe was mainly driven by its B-segment Honda City, new face-lifted Honda CRV and new compact SUV Honda HRV. Meanwhile, Toyota defended its turf as the biggest non-national marques player with the lion market share in the commercial marques (at 28.5%).

Blessing or curse in disguise? While March TIV made up for the sales weakness in January and February, our concern remained with the potential margins erosion (arising from the heavy discounts) that could post earnings risk to the auto companies’ 1QCY15 results. We are still maintaining our 2015 TIV forecast of 667,000 units as we see headwinds ahead amidst lower disposable income as a result of the GST implementation and rising living cost. Despite cheaper prices seen in some of the marques as a result of SST being replaced by GST, we do not see it as a strong re-rating catalyst for the sector as the small price reductions of 1-5% are insignificant compared to the total cost of ownership. Moreover, we observed earlier aggressive promotions in which discounts were greater than the post-GST reduction.

Another headwind to the auto players’ margins. On the currency side, with the weakening trend of MYR to persist in 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. 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 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 for TCHONG, we gather that a 10.0 sen change in USD vs MYR could impact its PBT as high as c.RM60m. We have imputed an average RM3.50/USD for CY2015 to the abovementioned companies. 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 BJAUTO’s FY15E and FY16E numbers. Based on our sensitivity analysis, every 1% fluctuation 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. There are no changes to our MARKET PERFORM call on UMW (TP: RM11.00), DRBHCOM (RM2.15) and MBM (TP: RM3.52). TCHONG (TP: RM2.80), meanwhile, is the only UNDERPERFORM in the sector due to its rich valuation of 17x FY15E PER with no immediate re-rating catalyst in sight.

Source: Kenanga Research - 23 Apr 2015