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 as well as rising costs and poor consumer spending. MAA’s TIV sales for Oct 2016 registered 47,879 units (-1% MoM, -14% YoY). As a result, YTD 10M16 TIV of 466,208 (-14%) comprised 82% of our 570,000 unit forecast for 2016. We believe the stagnant sales were a result of consumers holding back purchases in anticipation of the introduction of incentive for first-time car buyers. We expect stronger sales to be registered for the remainder of the year, driven by new models launched from prior months as well as aggressive year-end sales and marketing efforts. However, our view remains conservative given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers’ profitability. While BAUTO (OP; TP: RM2.67) could face earnings risks should the prevailing MYR weakness persists, it remains as our preferred stock in the sector for now given its: (i) better top line growth prospect from a low base on the back of strong pipeline of exciting models, and (ii) potential dividend pay-out of c.90% (c.8.5% div. yield).

Oct 2016 TIV recorded at 47,879 (-1% MoM, -14% YoY). While there was anticipation for sales growth to be seen in Oct 2016 on the back of new model launches to stimulate sales, the net performance fell slightly short compared to Sep 2016 sales. We believe this was due to consumers withholding their purchase decisions pending the 2017 Budget during mid-month where it was previously speculated that certain incentives may be available for first-time car buyers (refer to overleaf for commentary on 2017 Budget incentives for the sector). The YoY weakness (-14%) 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 (+26%), likely led by the new Proton Saga which hit the market in Sep 2016. Honda (+9% MoM) was the only other growing marque, with sales likely driven by the Honda Accord targeted at the upper-middle income consumer segment. On the other hand, Nissan appeared to be one of the worst performers with both MoM (-21%) and YoY (-41%) contraction as consumers continue to favor the fresh selections from its competition as of late. Toyota also fell deep in YoY terms (-42%) from intense competition, but we believe there will be some recovery in the coming months as the face-lifted Toyota Vios has entered into the market.

Hoping for a more exciting 4Q16. Though there was some disappointment in Oct 2016 TIV numbers, we continue to believe that new model launches, especially from auto heavyweights that have begun rolling into the market, will revitalise consumer buying interest for those seeking newer selections 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 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. In addition, there may be higher levels of demand for Mazda cars for the year given the announcement of a price increase from Jan 2017 as a means for BAUTO to cope with the rising production costs from unfavourable forex. We should also expect other auto players to partake in aggressive sales and marketing campaigns during the year-end period to make up for the slow sales during the year.

YTD 10M16 TIV of 466,208 (-14%) comprised 82% 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 (OP; TP: RM2.67) remains our top pick for the sector. Though we are in the midst of re-evaluating the stock’s earnings prospect in view of its high exposure to the Japanese Yen which has been trailing at high levels over the past several months, we believe the stock may yet outperform its peers given that its targeted customer base in the middle-income to highincome bracket 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 a 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 top line 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.8.5%. BAUTO is currently trading at an undemanding valuation of 13.9x forward PER, which is below industry average forward PER of 30.0

Source: Kenanga Research - 21 Nov 2016