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), Feb16 TIV nosedive to a 7-year low at 37,876 units (-15% MoM and -25% YoY). While seasonality weakness (long holidays during Feb16) was a contributory factor, we believe cautious consumer sentiment played a bigger role in the pallid sales, with spending turning more cautious on big-ticket discretionary items amid rising cost of living, as echoed by the apparent slowing demand trend of passenger car loans as highlighted in the BNM monthly stats. Additionally, tighter lending guidelines also exacerbated the situation. In terms of outlook, while we believe weak consumer demand should continue to underpin the coming months’ TIV (at least until June) as consumers continue to adjust to the rising cost of living and higher car prices, it may not be all gloom and doom for 2016 as we expect several new attractive models launching in the 2H16 to excite the market, with the likes of new models 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, Innova and upgraded Vios. We keep our 2016 TIV forecast of 650,000 (-2.5%) unchanged for now in anticipation of a stronger 2H16 TIV to make up for the shortfall. In our automotive coverage, we continue to favour BJAUTO (OP, RM2.41) as our preferred stock as we view it as a rose among the thorns given its target customer base in the middle-income to high-income bracket that are less sensitive to the rising cost of living. BJAUTO is also backed by the investment merits of: (i) better growth prospect from a 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 translates into c.5.0% dividend yield. In terms of valuation, it is still trading at an undemanding valuation of 11.1x FY17E PER, against the industry average forward PER of 14.8x, a steep discount of 25%.

Mix-to-Negative 4QCY15. For the quarter, only two out of five stocks under our coverage; namely, MBMR and TCHONG, reported results, which came in within our expectations. On the underperformers, UMW and DRBHCOM made losses in the quarter dragged by the cut-throat margins in their respective Automotive segment; with the former exacerbated by wider-thanexpected Oil & Gas segment’s losses. Meanwhile, BJAUTO’s dismal results were owed to unfavourable sales mix. Post results, while we maintained all ratings for our stock coverage, we trimmed the TPs for BJAUTO (OP) to RM2.41 from RM2.63, DRBHCOM (UP) to RM0.80 from RM1.06, MBM (MP) to RM2.30 from RM2.98 and UMW (UP) to RM4.89 from RM6.73 following our downward earnings revisions. TCHONG (UP, RM2.15) was the only stock with TP unchanged.

February 2016, weakest monthly TIV in 7 years at 37,876 units (-15% MoM and -25% YoY). While seasonality weakness played a part, we see cautious consumer sentiment as a bigger contributing factor to the pallid sales, with spending turning more cautious on big-ticket discretionary items amid rising cost of living, as echoed by the apparent slowing demand trend of passenger car loans as highlighted in the BNM monthly stats. Additionally, tighter lending guidelines also exacerbated the situation. Meanwhile on the passenger vehicles segment, an overall decline was seen MoM with the biggest underperformers on percentile terms in Mazda (-42%), followed by Proton (-23%) and Honda (-23%) among all the major marques. Though we are cognizant of the Mazda’s sharp sales drop, we are not overly perturbed by this as we see it as a normalisation from the high base. Recall that the strong Mazda’s sales in January were boosted partly by its new B-segment SUV- CX-3, in addition of the ongoing demand for its flagship Mazda2 and Mazda3. On a YoY perspective, while softer sales were seen across all passenger marques, Toyota recorded the largest depressed TIV (-40%) owing to the lack of attractive models launching.

Better 2H with attractive pipeline of models launching. We believe weak consumer demand will continue to underpin the coming months’ TIV (at least until June) with consumers taking time to adjust to the rising cost of living and higher car prices (particularly from Toyota, Honda and Nissan, starting from Jan16 to buffer higher import costs of components and CBUs). This will result to some degree, margin compression as automotive players have to ramp up their promotional efforts amidst the fierce competition in the now highly saturated automotive market. However, it may not be all gloom and doom as we can expect several new model launches during the second half of 2016 to excite the market, with the likes of 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, Innova and upgraded Vios. We keep our 2016 TIV forecast of 650,000 (-2.5%) unchanged for now.

BJAUTO remains our preferred stock as we view it as a rose among the thorns given its targeted customer base in the middle-income to high-income bracket that are less sensitive to the rising cost of living. Despite of the recent results shortfall, we are still optimistic with its investment merits as it appears to be supported by: (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 fair dividend yield of c.5.0%. BJAUTO is currently trading at an undemanding valuation of 11.1x forward PER, which is below its industry average forward PER of 14.8x.

Source: Kenanga Research - 6 Apr 2016