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. Vehicle sales numbers have continued to slide downwards in Apr 2016 to 42,177 units with YoY (-6.7%) and MoM (-13.6%) performances believed to be dragged down by prevailing weak consumer sentiment as well as stringent lending guidelines. YTD 4M16 TIV of 173,432 (-18.8%) comprises only 26.7% of our 2016 forecast of 650,000. We are trimming our 2016 TIV forecast by 29,000 units to 621,000 (-4.5%) units on slower than expected recovery in the 2H. Meanwhile for our coverage, we see earnings risks in the upcoming auto companies’ 1QCY16 results (namely UMW and DRBHCOM) given the poorer YTD TIV sales volume, aggravated by suppressed margins as a result of higher import costs during the first quarter of 2016. BJAUTO (OP, TP: RM2.41) still remains as the most appealing with: (i) better growth prospect from a low based on the back of strong pipeline of exciting models, (ii) relatively stable margins from lower import duties, and (iii) potential dividend payout of 56% (c.4.7% div. yield).

Apr 2016 TIV recorded at 42,177 units, the fourth consecutive months in the red in terms of YoY TIV (-6.7% YoY, -13.6% MoM). We continue to attribute the poorer sales in both YoY and MoM terms from the persistent weakness in consumer sentiment, especially for big-ticket discretionary items. More stringent lending guidelines further worsened the situation as lower approval rates deterred new car buyers. This led Apr 2016 TIV to register even poorer results than Apr 2015, which was already adversely affected by the implementation of GST during that period. At a closer look to the MoM sales of the major passenger marque, Toyota was the only outperformer in Apr 2016. We believe this to be the transition of customer base from Nissan back to Toyota, which experienced the largest MoM decline of 32.1%, as it implemented price hikes for certain models effective 1st April 2016. On a YoY basis, Mazda showed an exceptional improvement of 97.1% while all other marques showed decline such as Perodua (-15.3% YoY), Toyota (-14.3% YoY) and Nissan (-12.2% YoY). This was due to the low base in Apr 2015 where Mazda’s demand experienced a negative knee-jerk reaction post GST implementation and benefited from sustainable reception for its new face lifted models, which were released around 4QCY15.

YTD 4M16 TIV of 173,432 comprises of 26.7% of our 2016 forecast of 650,000. We trim our 2016 TIV forecast to 621,000 (-4.5%) units. We revise our expectations given the anticipation of slower than expected recovery in the market, mainly on the larger underperformers Toyota, Proton and Perodua as interests in older models begin to cool down. Our assumption is premised on the ongoing economic headwinds where consumers are struggling to adjust to the rising cost of living and more costly car prices (particularly from Toyota, Honda and Nissan, starting from Jan 2016 to buffer higher import costs of components and CBUs). Moreover, the more stringent lending guidelines also exacerbated the situation. Having said that, we can expect several new model launches during the second half of 2016 to stimulate the market during these trying times, 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.

Earnings risks in the upcoming auto companies’ 1QCY16 results (namely UMW and DRBHCOM) with warning signs provided by the Jan-Mar 2016 TIV which saw a general decline by c.22%. So far, TCHONG (UP, TP:RM1.76) has presented weaker results attributed to lower sales and eroded margins from promotional offerings in an attempt to stay competitive in the market during 1QCY16. The effects of unfavourable exchange rates caught up on TCHONG’s already suppressed earnings, resulting in even poorer earnings. MBMR (MP, TP: RM2.37) also registered softer results in 1QCY16, not only from lower motor trading volume but also weaker volume in auto parts manufacturing segment as TIP declined from YTD 3M15 163,697 to YTD 3M16 129,591 (-21%). While we are already projecting conservative earnings estimates on both stocks, similar tidings could weigh into UMW (UP, TP: RM4.89) and DRBHCOM’s (UP, TP: RM0.80) upcoming results, which might warrant a cut in our earnings estimates. We made no earnings changes for now in view of the upcoming results review next week.

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. More positively, the recent management buyout could also remove the overhang on its shares while a positive knee-jerk reaction could be reflected in the share price in the foreseeable future. All in, we are still optimistic with its investment merits 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.4.7%. BJAUTO is currently trading at an undemanding valuation of 11.8x forward PER, which is below industry average forward PER of 13.4x. 

Source: Kenanga Research - 19 May 2016