We downgrade our NEUTRAL call to UNDERWEIGHT given the outweighing of UNDERPERFORM ratings in the total market capital of our stock coverage coupled with the lack of re-rating catalyst in 2016. According to the latest data from the Malaysian Automotive Association (MAA), November 2015 TIV only inched up by 1% sequentially and annually, bringing YTD11M15 TIV to 597,273 units (or -1%). Note that this only made up 90% and 89% of our (flat at 667,000 units) and MAA’s 2015 TIV growth estimate (of +0.5% to register at 670,000 units) assumptions. Delving deeper into our 2015 TIV forecast of 667,000 units, this implies December TIV sales of c.70k units, which we believe is hardly achievable considering the past three years’ historical monthly TIV performance (with the highest monthly TIV achieving c.68k), amid the current muted consumer sentiment. We have cut our 2015 TIV forecast by 10,000 units, with our new 2015 TIV forecast now at 657,000 units (-1%). We expect 2016 TIV to contract further to 650,000 units (- 1%), with an expectation of challenging operating environment in 2015 to further exacerbate in 2016. Besides, the rising cost of living coupled with a series of subsidy rationalisations, higher car prices (indicated by major marques starting from Jan 2016), relative to the lower disposable income will further weigh on the pallid auto sales growth. With consumers being more price-sensitive to big-ticket items, we believe down-trading could be the key trend for consumers still opting for new vehicles purchases. Implication to the automotive players will be weaker sales mix (gravitating to the cheaper models). Coupled with the intensifying competition in this highly saturated automotive market, we believe margin compression will continue to be seen among the automotive players. BJAUTO (OP, RM2.63) remains as our pick for the sector premised on: (i) better growth prospect from low base on the back of strong pipeline of exciting models, (ii) relatively stable margins, benefiting 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 (trading at a forward 10.1x PER, a steep 36% discount from the industry average forward PER of 15.8x) on current price weakness.

Another dismal quarter in 3QCY15. Save for BJAUTO (which was mainly helped by higher sale volume in its Philippines operation), none of the automotive players were spared the adverse currency fluctuations as well as higher A&P expenses amid fierce competition, which led to cut-throat margins. Post-results, we have downgraded both UMW and DRBHCOM’s ratings to UNDERPERFORM (amid lower TPs) given the downward earnings revisions coupled with the expectations of challenging outlook in 2016. Meanwhile, we have also cut MBMR (but maintain MP) and TCHONG’s TPs lower (maintain UP) in conjunction with downward earnings revision. BJAUTO is the only OUTPERFORM stock within our coverage universe in the sector, premised on its resilient earnings prospects coupled with undemanding valuation.

Still a weak November TIV. Despite the ongoing aggressive A&P activities, November 2015 TIV only inched up by 1% sequentially and annually, bringing YTD11M15 TIV to 597,273 units (or -1%). Note that this only made up 90% and 89% of our (flat at 667,000 units) and MAA’s 2015 TIV growth (of +0.5% to register at 670,000 units) assumptions. Delving deeper into our 2015 TIV forecast of 667,000 units, this implies December TIV sales of c.70k units, which we believe is hardly achievable considering the past three years historical monthly TIV performance (with the highest monthly TIV achieving c.68k), amid the current muted consumer sentiment. Hence, to fine tune our assumption, we have cut our 2015 TIV forecast by 10,000 units, with our new 2015 TIV forecast of 657,000 units (- 1%). Glancing through the performances of major marques in November, Toyota and Honda were the outperformers which we believe were mainly helped by consumers’ pre-emptive purchases ahead of the coming 2016 price hikes on top of heavy discounting. Notably, Mazda sales in November also saw leaps and bounds improvement with +80% YoY growth, which we believe was a reflective of the normalization from low base (recall that Mazda sales in Nov14 was affected by the paint shop upgrading work at Inokom's plant, thus leading to short-term supply disruption for CKD models). On YTD basis, sales growth of Proton and Toyota are still capped in the negative territory owing to the lack of attractive models launching.

Bumpy road ahead in 2016. We expect 2016 TIV to contract further to 650,000 units (-1%), with an expectation of challenging operating environment to further exacerbate in 2016. Besides, the rising cost of living coupled with a series of subsidy rationalisations, higher car prices (indicated by major marques- Proton, Perodua, Toyota, Honda and Nissan, starting from Jan16 to buffer higher import costs of components and CBUs), relative to the lower disposable income will further weigh on the pallid auto sales growth. With consumers being more pricesensitive to big-ticket items, we believe down-trading could be the key trend for consumers still opting for new vehicles purchases. Implication to the automotive players will be a weaker sales mix (gravitating to the cheaper models). Coupled with the intensifying competition in this highly saturated automotive market, we believe margin compression will continue to be seen among the automotive players.

BJAUTO still our pick for the sector. 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. BJAuto is currently trading at an undemanding valuation of 10.1x forward PER, which is at a steep discount of 36% against its industry average forward PER of 15.8x. 

Source: Kenanga Research - 7 Jan 2016