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 as well as rising costs and poor consumer spending. MAA’s TIV sales for Sep 2016 registered 48,191 units (-8% MoM, -6 YoY). As a result, YTD 9M16 TIV of 418,433 (-14%) comprised 73% of our 570,000 unit forecast for 2016. We believe the slower sales during the month is owing to the higher base in August as well as consumers holding back their purchases in view of coming launches of the muchanticipated new Proton Saga and facelifted Toyota Vios. We expect stronger sales to be registered for the remainder of the year as more models become available in the market to stimulate consumer interests. However, our view remains conservative given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers’ profitability. BAUTO (OP; TP: RM2.67) still holds out as our top pick for its: (i) better topline 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.8.1% div. yield).

Sep 2016 TIV recorded at 48,191 units (-8% MoM, -6% YoY). September saw a decline in sales, attributed to the higher base set in August from heavier level of purchases of newer models at that time (i.e. Perodua Bezza, new Proton Perdana, new Honda Civic). At the same time, we believe consumers were also withholding their purchases in anticipation of further model launches from late-September which drew widespread media attention, which included the new Proton Saga, launched in late September and the face-lifted Toyota Vios, launched in early October. The YoY weakness (-6%) demonstrates the continued pressure felt by consumers in relation to tighter lending requirements and higher living expenses, as compared to 2015. Proton reflected the strongest MoM gain (+37%), likely spearheaded by the release of the Proton Perdana in August. Though Mazda came in second in terms of MoM performance and registered flattish sales numbers, we view the results as commendable as its attractive model offerings appear to command continued buying interest despite heavy competition from newer models in the market. In YoY terms, Perodua led its peers with 18% growth which we believe is backed by the strong reception of its new Perodua Bezza.

Hoping for a more exciting 4Q16. 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 first-time vehicle owners. Furthermore, consumers in the lower income segment may at last be loosening their wallets with the Perodua Bezza and the Proton Saga going head-to-head. Other new models launched to compete in the market are the new Proton Persona, the new Honda Civic and face-lifted Accord, the new Toyota Alphard and Vellfire as well as the recently launched face-lifted Vios. Forthcoming model launches are the new Honda BRV, the face-lifted City, Jazz, the new Toyota Innova and face-lifted Camry.

YTD 9M16 TIV of 418,433 (-14%) comprised 73% of our 570,000 unit forecast for 2016. We made no changes to our yearend forecast as we believe our target is achievable with more robust sales in months to come. That being said, our view on the sector remains conservative as consumer purchases of automobiles have been clamped by stringent lending guidelines as well as prevailing weakness in sentiment resulting from higher living expenses. In addition, automakers have been experiencing a pinch in their profit margins with operating costs being pressurised by unfavorable forex.

BAUTO 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 the robust growth prospect. All in, we are still optimistic with its investment merits supported by: (i) better topline 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.8.1%. BAUTO is currently trading at an undemanding valuation of 14.5x forward PER, which is below industry average forward PER of +30.0x. Risks to our call include: (i) adverse forex exposure to the Japanese Yen, and (ii) weaker-than-expected automotive sales.

Source: Kenanga Research - 21 Oct 2016