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 in June 2016 of 57,358 units displayed strong growth in MoM terms (+28%) driven by aggressive promotional activities and campaigning in lieu of the Hari Raya festive seasons, while closely matching June 2015 TIV numbers of 57,436 units. YTD 6M16 TIV of 275,459 units (-15%) constituted 44% of our 2016 forecast of 621,000 units. We maintain our current forecast in anticipation of better 2H16 sales from new models launched such as the Perodua Bezza, the Proton Perdana and the new Honda Civic. BJAUTO (OP; TP: RM2.62) still holds out as our top pick for its: (i) better growth prospect from a low base on the back of strong pipeline of exciting models, (ii) relatively stable margins from lower import duties, and (iii) potential dividend payout of c.70% (c.7.8% div. yield).
Jun 2016 TIV recorded at 57,358 units, displaying the strongest MoM growth YTD (0% YoY, +28% MoM). Sales volume for the month was rejuvenated thanks to aggressive promotional activities and campaigning by automotive players in lieu of the Hari Raya festive seasons. We believe the boost in vehicles sales also came in hand with our earlier assumptions that the impact of GST to consumer sentiment has softened as consumers are becoming more accustomed to the higher price levels for daily expenditures. On a MoM basis, Honda demonstrated the largest growth at 64% which we believe was spearheaded by the new Honda Civic launched during the month. Nissan and Proton both followed with 37% growth with Perodua next in line at 31% sales growth, possibly thanks to highly aggressive promotional incentives to provide more value-for-money offerings to buyers. On a YoY basis, Perodua generated the strongest growth at 22%. However, we believe this is due to comparison against a lower base as Jun 2015 sales was heavily undermined by poor consumer sentiment as the GST introduced in Apr 2015. Proton, on the other hand, experienced the largest dip in YoY sales by -25% due to the lack of new model launches since the Proton Iriz in 2014 until only recently to garner consumer interest.
New model launches in 2H16 should bring the sector back to its feet. Most of the 1H16 TIV sales were adversely affected by poor consumer sentiment from higher living costs, more stringent lending guidelines as well as the lack of new model launches to generate buying interest from consumers. We believe the sector will finally see a shift in direction with several largely hyped new model launches seen recently, such as the new Perodua Bezza the new Proton Perdana and new Honda Civic. Other forthcoming model launches such as the new Honda BRV, facelift City, Jazz and Accord, diesel engine models from Mazda and new Toyota Hilux, Fortuner, Innova and upgraded Vios, are anticipated to attract consumers back into the automotive market. YTD, 6M16 TIV of 275,459 units comprises of 44% of our 2016 forecast of 621,000 units. We maintain our current forecast in anticipation that 2H16 sales will pick up to meet our estimates.
BJAUTO remains our top pick as we view it as a rose among the thorns given its targeted customer base in the middleincome to high-income bracket that are less sensitive to the rising cost of living. More positively, the recent management buyout could have also removed 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 pay-out of c.70%, which translate into fair dividend yield of c.7.8%. BJAUTO is currently trading at an undemanding valuation of 10.9x forward PER, which is below industry average forward PER of 20.6x.
Risks to our call include: (i) adverse forex exposure to the Japanese Yen, and (ii) weaker than expected automotive sales.
Source: Kenanga Research - 21 Jul 2016