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 2017 as well as rising costs and poor consumer spending. MAA’s TIV sales for Nov 2016 registered at 49,085 (+3% MoM, -12% YoY). As a result, YTD 11M16 TIV of 515,293 (-14%) comprised 90% of our 570,000 unit forecast for 2016. Sales are believed to be picking up with a wider range of new models launched during prior months on top of the aggressive sales campaigns by auto players. However, our view remains conservative given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers profitability, the lack of rerating catalysts for the sector. We continue to favour BAUTO (OP; TP: RM2.36) despite our recent earnings estimates trimmed on adverse forex exposure, for 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.7.2% div. yield).

A mixed 3Q16, as MBMR performed above expectations from higher-thanexpected associate contributions from Perodua, while TCHONG beat our estimates due to better-than-expected impact from the increase in selling price of Nissan vehicles. BAUTO performed below expectations due to delays in vehicle deliveries owing to the temporary closure of a contract assembler’s plant as well as adverse forex translation. Although both DRBHCOM and UMW also saw their auto segments dragged by mounting forex pressures as well as poor consumer sentiment, UMW’s earnings were further affected by widening losses in its Oil & Gas segment. Post-results, we maintain the ratings for all our coverages. Meanwhile, we upgraded our TP for MBMR (UP)

to RM2.49 from RM2.37 to account for better performance from associates (i.e. Perodua). We maintain our TCHONG (UP) TP of RM1.66 in lieu of the lack of rerating catalysts while downgrading the TP for BAUTO (OP) to

RM2.36 from RM2.67, DRBHCOM (UP) to RM0.95 from RM1.02 and UMW (UP) to RM4.27 from RM4.45 as we adjusted for lower earnings and greater costs assumptions.

Nov 2016 TIV recorded at 49,085 (+3% MoM, -12% YoY). Stronger sales this month was expected given the wide range of models launched in prior months on top of the aggressive sales campaigning by auto players during the year-end period to make up for the slow sales during the year. The YoY weakness in the Passenger segment (-12%) demonstrated the continued pressure felt by consumers in relation to tighter lending requirements and higher living expenses, as compared to 2015, which appeared to have affected Toyota (-33% YoY) and Nissan (-25% YoY) the most. However, Toyota demonstrated the strongest MoM gain (+26%), possibly led by the face-lifted Toyota Vios, their most affordable offering, which entered the market in lateOct. Nissan also registered strong MoM growth (+23%). However, we see this as a normalization of demand for the brand as it usually registers monthly sales of c.2,400 units but was underpinned in October by model launches by competitors during that month. On the underperformers in MoM sales terms, Mazda declined the most, by 23%, likely the result of slower vehicle delivery from the temporary closure of a contractor’s assembly plant, in addition to their low base, which extended its YoY weakness (-36%).

Looking forward into 2017, we maintain our estimates of 610,000 units with a limited growth of 7% YoY. This is in line with our conservative view with consumer purchases for automobiles being 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. Furthermore, there is a lack of rerating catalysts to bring about any significant shift in the sector. That being said, TIV sales numbers going forward are likely to be driven by the models launched in 2H16, such as the Perodua Bezza, the Proton Saga, the new Proton Persona and Ertiga, the new Honda Civic and the face-lifted Toyota Vios with the new Innova. Forthcoming model launches are the new Honda BRV, the face-lifted City, Jazz and face-lifted Camry.

(refer to the overleaf for our commentary on the YTD 11M16 TIV results)

BAUTO (OP; TP: RM2.36) remains our top pick for the sector. Though we had recently cut our earnings prospect for the stock in view of its high exposure to the Japanese Yen which has been trailing at high levels over the past several months, we believe it may yet outperform its auto peers given that its targeted customer base in the middle-income to high-income 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 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.7.2%. BAUTO is currently trading at 10.9x FY18E PER.

YTD 11M16 TIV of 515,293 (-14%) comprised 90% of our 570,000 unit forecast for 2016. We made no changes to our year end forecast as we believe our target is achievable with more robust sales expected in December. In addition, there may be some preemptive buying in lieu of the intended price increase for selected models of certain brands, such as Mazda and Perodua. This may dampen sales for these brands in the early months of 2017 until consumers are able to adjust to the new prices. However, we believe the impact will be neutral to TIV numbers as this may result in a transfer of market share between brands given the wide offerings available to cater to the different consumer segments.

Source: Kenanga Research - 6 Jan 2017