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 Aug 2016 registered 52,312 units (23% MoM, -2% YoY). As a result, YTD 8M16 TIV of 370,242 (-15%) comprised 65% of our 570,000 unit forecast for 2016. Strong MoM sales growth was due to the high demand for new model launches as well as the longer working month, as compared to July 2016, which saw prolonged non-working days from the Hari Raya festivities. We believe strong sales momentum should continue for the remainder of the year as highly anticipated model launches are finally available in the market. However, this is insufficient to reverse our conservative view given the prevailing weak consumer sentiment as well as the unfavourable import costs that are corroding automakers’ profitability. BJAUTO (OP; TP: RM2.67) 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, and (ii) potential dividend pay-out of c.90% (c.7.8% div. yield).

An underperforming quarter, as most of our coverages reported poorerthan- expected earnings, with the exception of MBMR, which performed within expectations following our conservative earnings cutbacks post 1Q16 results. BJAUTO, DRBCHOM, TCHONG and UMW were below expectations due to severe margin compression from aggressive promotional activities on top of higher import costs. BJAUTO’s earnings were also dragged down due to delay in vehicle delivery from the temporary closure of a contract assembler’s plant. UMW’s earnings, however, were further exacerbated by losses in its Oil & Gas segment. Post-results, we maintained the ratings for all our coverages with the exception of MBMR (TP: RM2.37) which we downgrade to UP following its share price rally to <3% upwards of our prescribed TP. Meanwhile, we upgrade our TP for BJAUTO (OP) to RM2.67 from RM2.62 as we roll over our valuation base year to FY18E. DRBHCOM (UP) has an upgraded TP of RM1.02 from RM0.76 as we ascribed a lower discount to its SoP in lieu of better trading sentiment. Following this, we downgraded the TPs of TCHONG (UP) to RM1.66 from RM1.76 and UMW (UP) to RM4.45 from RM4.95 as we adjusted for lower earnings assumptions.

Aug 2016 TIV recorded at 52,312 units (23% MoM, -2% YoY). The boost in monthly sales was attributed by the strong sales derived from new model launches by auto players, particularly on more affordable releases. The longer working month in August had also contributed to sales growth where July had longer non-working days in lieu of the Hari Raya festive season. Although YoY results slipped slightly (-2%), we perceive this performance as fair given the general weakness of the automotive market this year. The top MoM gain was achieved by Mazda (+52%), which we believe was due to the normalization of vehicle delivery lead-time after the slowdown caused by the temporary closure of BJAUTO’s contract assembler’s plant. This was seconded by Perodua (+44%) which sales were encouraged by the launch of its highly anticipated Perodua Bezza in July. On a YoY basis, Proton sales suffered the greatest (-51%) from declining consumer interest and heavier competition as compared to the prior year. However, MoM sales for Proton (+15%) could have been reinvigorated by the new Perdana.

Has the sector entered a recovery phase? 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. However, as new model launches, especially from auto heavyweights have begun rolling into the market, we should finally see consumer buying interest being revived as consumers seek the newer models for vehicle replacements or for firsttime vehicle owners. Such of these new launches in the market are the Perodua Bezza, the new Proton Perdana, the new Honda Civic as well as the new Toyota Alphard and Vellfire. Forthcoming model launches are the new Honda BRV, facelift City, Jazz and Accord, and new Toyota Hilux, Fortuner, Innova and upgraded Vios.

YTD 8M16 TIV of 370,242 (-15%) comprised 65% of our 570,000 unit forecast for 2016. We made no changes to our yearend forecast as we believe our target is achievable with stronger sales in months to come. Possible incentives for first time car buyers? It was reported by a local newspaper that the government may unveil certain incentives where first time car buyers would enjoy a waiver of excise duties. It added that this may only be applied to CKD vehicles. Assuming this to be true, major boons would be enjoyed by DRBHCOM, TCHONG and UMW as they command local manufacturing facilities along with boosting the sales of certain models for Honda, Nissan, Proton, Perodua and Toyota brands, as their prices could be brought to a slightly more affordable level. However, we expect the move to be more favorable to brands (i.e. Proton and Perodua) with higher CKD content and targeting towards lower income group of consumers for being the largest market segment in the country. We foresee the top beneficiary of this exercise to be TCHONG, as the incentive could narrow its prices closer to that of local marques offerings (particularly on the Nissan Almera) as well as provide the quality and branding of Nissan’s Japanese marque. In contrast, this would place pressure on more premium-priced players as other offerings may appear more attractive, i.e. BJAUTO for Mazda cars.

BJAUTO remains our top pick for the sector, 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. We also see high potential value to be unlocked with the proposed listing of its Philippines subsidiary given its robust growth prospect. 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, and (ii) potential dividend pay-out of c.90%, which translate into fair dividend yield of c.7.8%. BJAUTO is currently trading at an undemanding valuation of 15.1x forward PER, which is below industry average forward PER of 20.0x. Risks to our call include: (i) adverse forex exposure to the Japanese Yen, and (ii) weaker-than-expected automotive sales.

Source: Kenanga Research - 7 Oct 2016