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 January 2017 registered at 44,667 (-31% MoM, +0% YoY). We attribute the sharp MoM TIV drop due to the high base in December 2016 (which was due to aggressive sales campaigning by auto players during the year-end period to make up for slow sales that year). January 2017 YoY TIV grew flattish on the back of shorter working month due to the Chinese New Year festive holidays and impact of floods in the East Coast yet to fully recover. Looking into 2017, we reduce our estimates to 590,000 units with a limited growth of 1.7% YoY in line with our conservative view given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers’ profitability, and the lack of rerating catalysts for the sector. We continue to favour BAUTO (OP; TP: RM2.36), for its: (i) better top line growth prospect from a low base on the back of strong pipeline of exciting models, (ii) potential dividend pay-out of c.90% (c.7.3% div. yield), and (iii) recent price hike up of to RM6,000 for Mazda cars.

January 2017 TIV came in weaker at 44,667 units (-31% MoM and +0% YoY). We attribute the sharp MoM TIV drop due to the high base in December 2016 (which was due to aggressive sales campaigning by auto players during the year-end period to make up for slow sales that year). January 2017 YoY TIV grew flattish on the back of shorter working month due to the Chinese New Year festive holidays and impact of floods in the East Coast yet to fully recover. Taking a closer look at the passenger vehicles segment (-30% MoM, +1% YoY), while sales of all major marques saw softer sales sequentially, on YoY basis, Honda and Toyota surged substantially by 50% and 129% respectively, which we believe was mainly driven by its new line of vehicles, primarily, the face-lifted Toyota Vios, the new Toyota Innova, the new Honda Civic and the new Honda BRV. On the outperformers in MoM sales terms, Mazda registered the highest growth of 33% to 789 units. However, we see this as a normalisation of its vehicle delivery from the slowdown in Dec 2016, following the temporary closure of a contractor’s assembly plant. On the underperformers in MoM sales terms, Nissan declined the most (-70%), followed by Perodua (-42%) as there were heavy buying during the previous month.

Speed bump. Driving into 2017, in lieu of higher living expenses, we believe consumers may continue to limit spending on bigticket items. Furthermore, the unfavourable forex is still the main issue for automakers, squeezing their profit margins with higher operating costs. With this, we gather there is 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 new models launched, such as the face-lifted Perodua Axia, Perodua Bezza, the new Proton Saga, the new Proton Persona, Proton Ertiga, the new Honda Civic, the facelifted Toyota Vios, the new Toyota Innova, the new Toyota Corrolla Altis and the new Honda BRV. Forthcoming model launches are the face-lifted Honda City, Honda Jazz Hybrid, Honda CR-V, the new Toyota CH-R, Toyota Hilux 2.4G Limited Edition and face-lifted Toyota Camry.

January 2017 TIV of 44,667 comprised 7% of our 610,000 unit forecast for 2017. 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. Furthermore, we expect 2017 would only benefit from the spill over of new launches from 4QCY16 as there are less launches this year as compared to last year. We reduce our estimates to 590,000 units on par with MAA estimates to reflect the reduction in production of affordable passenger marques.

BAUTO (OP; TP: RM2.36) remains our top pick for the sector. Though we expect softer 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 be a safer bet given that its targeted customer base in the middle-income to high-income bracket are less sensitive to the rising cost of living. 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.7.3%, and (iii) recent price hike up to RM6,000 for Mazda cars. BAUTO is currently trading at 10.8x FY18E PER. In the meantime, our target price for UMW (TP: RM5.28) has been achieved with the rise in share price after the announcement of UMWOG demerger, thus, we downgrade our call from OUTPERFORM to MARKET PERFORM while maintaining the target price based on applied 12.0x PER to our FY17E EPS of RM0.44, where earnings are exclusive from O&G segment earnings, which was valued at 0.5x PBV separately.

Source: Kenanga Research - 22 Feb 2017