We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the outweighing of UNDERPERFORM ratings in the total market capitalisation of our stocks coverage coupled with the lack of re-rating catalyst for 2016. According to the latest data from the Malaysian Automotive Association (MAA), December 2015 TIV came in strongly at 69,401 units, being the highest monthly TIV achieved since Jan 2011. As a result, 2015 TIV closed at 666,674 units, which was a meagre improvement from the 2014 TIV of 666,487 units. We believe the stellar momentum was only an isolated event as we view that it was mainly boosted by the pre-emptive purchases ahead of car price hikes in January 2016 coupled with aggressive A&P activities given by players to boost sales. For 2016, we expect 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 demand. 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. We remain selective in our picks and prefer players who 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 universe coverage, BJAUTO (OP, TP: RM2.63) bests fits the theme with investment merits being (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.6.1% dividend yield. Moreover, we also see value emerging (trading at a forward 9.1x PER, a steep 35% discount from the industry average forward PER of 14.0x) on current price weakness.

December 15 TIV came in strongly at 69,401 units (+24% MoM and 7% YoY), bringing the 2015 TIV to 666,674 units which came in 1.4% above our forecast of 657,000 units. Although the exceptional strong TIV numbers appear to be the highest monthly TIV achieved since Jan 2011, we believe the stellar momentum was an isolated event as we believe it was mainly boosted by the pre-emptive purchases ahead of car price hikes in January 2016 coupled with aggressive A&P activities given by car companies to boost sales. Taking a closer look at the passenger vehicles segment, while sales of all major marques saw better growth sequentially, on YoY basis, Proton and Nissan were the only underperformers with sales dropping by 6% and 8%, respectively. We believe the former’s lackluster sales were owing to the lack of attractive models launching while the latter merely tipping off from the high base. For the year 2015, Mazda is crowned as the best sales performer in terms of growth (at +36%), which we believe was mainly driven by its flagship B-segment contender- Mazda 2 and C-segment Mazda 3. Following right behind was Honda, which also saw an impressive growth of 22%, which we believe was mainly driven by its B-segment Honda City, new face-lifted Honda CRV and new compact SUV Honda HRV.

Bumpy road ahead in 2016. We expect 2016 TIV to contract further to 650,000 units (-1%), with the 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 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 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, 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.6.1% dividend yield. BJAuto is currently trading at an undemanding valuation of 9.1x forward PER, which is at a steep discount of 35% against its industry average forward PER of 14.0x. 

Source: Kenanga Research - 22 Jan 2016