We maintain our NEUTRAL rating on the AUTOMOTIVE sector with an unchanged 2015 total industry volume (TIV) forecast of 667,000 units (flat growth assumption). According to the latest data from the Malaysian Automotive Association (MAA), September 2015 TIV recorded YoY growth of 7%, narrowing the negative gap of YTD9M15 TIV to -1% (from -2% previously) as opposed to our (flat at 667,000 units) and MAA’s 2015 TIV growth assumptions (of 0.5% to register at 670,000 units). We view that the 7% YoY improvement was merely a rebound from the low base in September 2014 TIV (recall that consumers were holding back purchases prior to the launching of Perodua Axia and Proton Iriz back then). Meanwhile on MoM basis, September TIV extended its weakness (-4% to 51,106 units) dragged mainly by most of the major marques except for Honda and Mazda. Looking at the upcoming 4Q15 sales volume, our flat TIV forecast of 667,000 units for 2015 implies 60,500 unit sales/month for Oct-Dec15 or 181,612 units for the quarter (+4% higher than 4QFY14’s TIV); which we believe is achievable on the back of pre-emptive purchases ahead of car price hikes in January 2016 as well as aggressive A&P activities. On the flip side, we believe all these catalysts will be at the expense of margins erosion. Meanwhile, another key potential earnings risk in the near term is the unfavourable exchange rates for auto players (in our portfolio universe: UMW and TCHONG) with high denominated USD costs due to the import of CBU vehicles, CKD packs and other components. Recall that MYR averaged at RM4.0536/USD during 3QCY15 vis-à-vis 2QCY15’s RM3.6597/USD, which weakened by 10.8% against USD. We remain selective in our picks and prefer players that are less vulnerable to the weakening MYR with its targeted customer base in the middle-income to high-income brackets that are less sensitive to the rising cost of living. Our Top Pick remains BJAUTO (OP, RM2.63) with investment merits backed by its: (i) better growth prospect from low base on the back of strong pipeline of exciting models, (ii) relatively stable margins, benefitting from the lower import duties from FTA with Japan, and (iii) potential dividend payout of 56%, which translate into c.5.5% dividend yield. Following its recent share price weakness, the stock is currently trading at an undemanding 10.0x forward PER, which is at a 19% discount to industry forward average PER of 12.4x.

Still a weak September TIV sequentially. While September 2015 TIV recorded YoY growth of 7%, narrowing the negative gap of YTD9M15 TIV to -1% (from -2% previously) as opposed to our (flat at 667,000 units) and MAA’s 2015 TIV growth assumptions (of 0.5% to register at 670,000 units), we view that the 7% YoY improvement was merely a rebound from the low base in September 2014 TIV. Recall that the weaker TIV back then were dragged down by the pallid sales of both national marques with consumers holding back purchases prior to the launching of Perodua Axia and Proton Iriz. Meanwhile on MoM basis, TIV extended its decline (- 4% to 51,106 units) dragged mainly by most of the major marques except for Honda and Mazda. Looking deeper into the passenger vehicles segment on YoY basis, both sales of national marques namely Perodua and Proton increased by 20% and 8%, respectively, from the low base effect mentioned above. Among the major non-national passenger marques, Honda and Mazda were the strong performers which we believe were mainly helped by their respective new flagship models (Honda: Honda HRV; Mazda: Mazda 2). On YTD basis, sales growth of Proton and Toyota are still capped in the negative territory owing to the lack of attractive models launching.

Short-term boost for 4Q15 TIV. Our flat TIV forecast of 667,000 units for 2015 implies 60,500 unit sales/month for Oct-Dec15 or 181,612 units for the 4Q15 (4% higher than 4QFY14’s TIV); which we believe is achievable on the back of pre-emptive purchases ahead of car price hikes in January 2016. Recall that Toyota and Honda have made announcements to raise their car prices (Toyota & Lexus: 4-16%, Honda: 2- 3%) beginning January 2016 to buffer the rising cost pressure resulting from adverse currency translation. Meanwhile, we also believe that auto companies will be more aggressive in A&P activities for the remaining months of 2015, to make up for the lagging sales caused by weaker consumer sentiment (due to GST implementation) in 1H. Thus, we view that stronger sales in the 4Q could also very likely be at the expense of margins.

Meanwhile, unfavourable exchange rates remain as the key earnings risk, particularly for the auto players (in our portfolio universe: UMW and TCHONG) with high denominated USD costs due to the import of CBU vehicles, CKD packs and other components. These are evidenced in the subpar 2Q15 results of both UMW and TCHONG where the higher CKD kits and CBU costs were the main culprits. Recall that c.1/3 of both group’s costs are denominated in USD with net impact to UMW relatively immaterial given the natural hedge from its USD revenuedenominated listed subsidiary, UMW Oil & Gas (90% revenue denominated in USD). Meanwhile, MYR averaged at RM4.0536/USD during 3QCY15 vis-à-vis 2QCY15’s RM3.6597/USD, which weakened by 10.8% against USD. Our sensitivity analysis suggested that for every 1% fluctuation in USD from our base case of RM3.80/USD, UMW and TCHONG’s bottomlines could be affected 3% and 6%, respectively. On the other hand, we view that BJAUTO should be protected from the adverse currency fluctuation for now as the group has a favourable hedging position from September to December at RM3.15/100 JPY currently. Recall that MYR averaged at RM3.3189/100 JPY during 3QCY15 vis-àvis 2QCY15’s RM3.0160/100 JPY, which weakened by 10.0% against 100 JPY. For BJAuto, our sensitivity analysis suggested that for every 1% fluctuation of MYR vs 100 JPY from our base rate assumption of RM3.20/100 JPY, the fluctuations will affect BJAuto’s FY16E bottomline by 4%.

BJAuto still a good BUY. We remain selective in our picks and prefer players that are less vulnerable to the weakening MYR with targeted customer base in the middle-income to high-income bracket that are less sensitive to the rising cost of living. In our coverage universe, BJAuto best fits this category with investment merits backed by its: (i) better growth prospect from low base on the back of strong pipeline of exciting models, (ii) relatively stable margins, benefitting from the lower import duties from FTA with Japan, and (iii) potential dividend payout of 56%, which translate into c.5.5% dividend yield. Moreover, we also see value emerging at this level (trading at a forward 10.0x PER, a steep 19% discount from the industry average forward PER of 12.4x) after the recent selldown. 

Source: Kenanga Research - 23 Oct 2015