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. MAA’s TIV sales for Jul 2016 registered at 42,471 units (- 26% MoM, -28% YoY). The weaker MoM sales were a result of heavy forward purchases by consumers in June in conjunction with the Hari Raya festivities in July, which also led to a shorter working month. The decline in YoY figures could be attributed by the higher base from July 2015 where the Hari Raya season arrived later that year. YTD 7M16 TIV of 317,930 (-17%) comprises 51.2% of our 621,000 unit forecast for 2016. Considering the slower-than-expected recovery in consumer sentiment, we revise our 2016 TIV forecast to 570,000 units (-8%). 2H16 sales is expected to improve, led by new model launches. BJAUTO (OP; TP: RM2.62) still holds out as our top pick for its: (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 pay-out of c.70% (c.7.8% div. yield).

Jul’16 TIV recorded at 42,471 units (-28% YoY, -26% MoM). The weak performance appears to be suppressed by the heavy forward purchases by consumers in June in conjunction to the Hari Raya festivities. The festive season may have also led to prolonged non-working days, limiting the sales potential by the auto players. The decline in YoY figures could be attributed by the higher base from July 2015 where the Hari Raya season arrived later during that year. Proton and Mazda appear to be the biggest losers in both MoM and YoY terms. Proton’s (-64% YoY, -44% MoM) decline is possibly due to the sales of the new Proton Perdana having yet to kick in as well as the lack of model launches since the Proton Iriz in 2014 to build consumer interest in the prior months. Mazda (- 47% YoY, -48% MoM) registered weakness which we believe was due to consumer interest being temporarily diverted in anticipation by the upcoming releases of new models by its competitors. Toyota (-33% YoY, -31% MoM) and Nissan (-30% YoY, -28% MoM) are other significant poor performers.

Upcoming new model launches should rejuvenate consumer demand. Most of YTD TIV sales were adversely affected by poor consumer sentiment from higher living costs as well as the lack of new model launches to generate buying interest from consumers during the prior month. We believe the lackluster demand would improve, led by several recent model launches, such as the new Perodua Bezza, the new Proton Perdana, new Honda Civic, diesel engine models from Mazda and the recent Toyota Sienta. Other forthcoming model launches such as the new Honda BRV, facelift City, Jazz and Accord, and new Toyota Hilux, Fortuner, Innova and upgraded Vios, are anticipated to attract consumers back into the automotive market.

YTD 7M16 TIV of 317,930 (-17%) comprises 51.2% of our 621,000 unit forecast for 2016. Considering the slower-thanexpected recovery in consumer sentiment, we revise our 2016 TIV forecast to 570,000 units (-8%). This is closely in line with MAA’s revised forecast of 580,000 units (-11%) from 650,000 units.

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 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 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 20.2x. Risks to our call include: (i) adverse forex exposure to the Japanese Yen, and (ii) weaker-than-expected automotive sales.

Source: Kenanga Research - 22 Aug 2016