We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the outweighing of UNDERPERFORM ratings in the total market capitalisation of our stock coverage coupled with the lack of re-rating catalyst for 2016. According to the latest data from the Malaysian Automotive Association (MAA), January 2016 TIV came in weaker at 44,591 units (-36% MoM and -12% YoY). While we attribute the sharp MoM TIV drop to the high base in December 2015 (which was due to the preemptive purchases ahead of car price hikes in January 2016 as well as seasonality), we see that the slowing trend is apparent, even from a low base of weak January 2015 TIV sales (which was dragged by the ‘wait-andsee’ approach among consumers in anticipation of lower car prices post GST implementation back then). While 2016 will see more attractive launchings of new and facelifted models by major marques (new Asegment model with Suzuki CKD kits by Proton, new Perodua Sedan, new Honda Civic, BRV, facelift City, Jazz and Accord, diesel engine models by Mazda and new Toyota Hilux, Fortuner and Innova), we still expect 2016 TIV to contract further to 650,000 units (-1%), with an expectation of the challenging operating environment in 2015 to further exacerbate in 2016. We believe that the rising cost of living coupled with a series of subsidy rationalisations, higher car prices by major marques (starting from Jan 2016), relative to the lower disposable income will weigh on the pallid auto demand with more downside pressure to be seen among national marques given its targeted customer base, which is more sensitive to the rising cost of living. 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, RM2.63) bests fits this 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.5.5% dividend yield. Moreover, we also see value emerging (trading at a forward 10.1x PER, a steep 28% discount from the industry average forward PER of 14.0x) on current price weakness.

January 2016 TIV came in weaker at 44,591 units (-36% MoM and - 12% YoY). While we attribute the sharp MoM TIV drop to the high base in December 2015 (which was due to the preemptive purchases ahead of car price hikes in January 2016 as well as seasonality), we see that the slowing trend is apparent, even from a low base of weak January 2015 TIV sales (which was dragged by the ‘wait-and-see’ approach among consumers in anticipation of lower car prices post GST implementation back then). Taking a closer look at the passenger vehicles segment, while sales of all major marques saw softer sales sequentially, on YoY basis, Mazda was the only outperformer with its sales surging by 65% which we believe was mainly driven by the increasing popularity in flagship models, primarily the Mazda2 and Mazda3. We also do not discount that its new model in B-segment SUV, the Mazda CX-3 contributed to Mazda’s growth as it has also garnered a fairly strong following since its sale 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. Beside the rising cost of living coupled with a series of subsidy rationalisations, higher car prices (by Toyota, Honda and Nissan, starting from January 2016 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 one of the key trends for consumers still opting for new vehicles purchases. Meanwhile, implication to the automotive players will be weaker sales mix (as buyers gravitate 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.5.5% dividend yield. BJAUTO is currently trading at an undemanding valuation of 10.1x forward PER, which is at a steep discount of 28% against its industry average forward PER of 14.0x. 

Source: Kenanga Research - 24 Feb 2016