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. Malaysian Automotive Association’s TIV sales for February 2017 registered at 42,455 units (-5% MoM and +12% YoY). We attribute the lower MoM TIV to seasonality weakness (shorter working month), whereas the YoY TIV grew stronger on the back of more attractive line-ups as compared to February 2016 (spill-over from 2H16). Driving around 2017, in lieu of higher living expenses, we believe consumers may continue to limit spending on big-ticket items. Furthermore, the unfavourable forex is still an issue for automakers, squeezing their profit margins with higher operating costs. We gather there is also 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 spill-over of new models launches from second half of last year, supported by a small number of launches this year. We keep our 2017 TIV forecast unchanged at 590,000. We choose BAUTO (MP; TP: RM2.11), as our preferred pick for the sector, backed by the investment merits of: (i) high potential value to be unlocked with the proposed listing of its Philippines subsidiary where robust growth in its automotive market is anticipated, (ii) potential dividend pay-out of c.90% (c.7.4% div. yield), and (iii) increase of average selling price c.4% for Mazda 2017 variants.

Worse-than-expected 4QCY16. For the quarter, only one out of five stocks under our coverage, namely, TCHONG, reported results above our expectation as we had overestimated its operating expenses. Overall, TCHONG registered poor results due to lower units sold for FY16 and unfavourable USD/MYR forex. On the underperformers, BAUTO fell short as a result of delay in vehicle deliveries owing to the temporary closure of a contract assembler’s plant as well as adverse forex translation. While DRBHCOM, MBMR and UMW saw their auto segments being dragged by mounting forex pressures as well as poor consumer sentiment, UMW’s earnings were further exacerbated by widening losses in its Oil & Gas segment. UMW had planned a strategic exit from its listed and unlisted Oil & Gas segment to re-focus on its three core segments, whereas, Proton, under DRBHCOM has received bids for strategic partnership with France’s Groupe PSA, China’s Zhejiang Geely and few other undisclosed bidders. Both strategic restructurings are expected to be partly finalised/executed by end-1H17. As we roll over our valuation base to FY18E, we made no changes to BAUTO (MP; TP: RM2.11) and DRBHCOM (UP; TP: RM0.95). TP-wise, we increase TCHONG (UP) to RM1.84 from RM1.66, and UMWH (UP) to RM5.77 from RM5.07; whereas, we upgrade MBMR to MARKET PERFORM from UNDERPERFORM with higher TP of RM2.75 from RM2.49 previously.

February 2017 TIV, registered at 42,455 units (-5% MoM and +12% YoY). We attribute the lower MoM TIV to seasonality weakness (shorter working month), whereas, the YoY TIV grew stronger on the back of more attractive line-ups as compared to February 2016 (spill-over from 2H16). Taking a closer look at the passenger vehicles segment (-4% MoM, +14% YoY), on YoY basis, Toyota, Honda and Perodua surged substantially by 82%, 37% and 18%, 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, the new Honda BRV, the face-lifted Honda City, and the face-lifted Perodua Axia. On the outperformers in MoM sales terms, Nissan registered the highest growth (+22%), followed by Perodua (+17%), from the discount and promotion to clear off 2016 inventories. On the underperformers in MoM sales terms, Mazda declined the most (-43%), followed by Toyota (-26%) as there were heavy buying during the previous month.

Spill-over from 2H16. Driving around 2017, in lieu of higher living expenses, we believe consumers may continue to limit spending on big-ticket items. Furthermore, the unfavourable forex is still an 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 spill-over of new models launches from the second half of last year, supported by a small number of launches this year, such as the face-lifted Perodua Axia, Perodua Bezza, the new Proton Saga, the new Proton Persona, Proton Ertiga, the new Honda Civic, the face-lifted Toyota Vios, the new Toyota Innova, the new Toyota Corrolla Altis, the new Honda BRV and face-lifted Honda City. Forthcoming model launches are the Honda Jazz Hybrid, Honda CR-V, the new Toyota CH-R, Toyota Hilux 2.4G Limited Edition and face-lifted Toyota Camry. We keep our 2017 TIV forecast unchanged at 590,000.

BAUTO (MP; TP: RM2.11) is our preferred pick for the sector. Though we expect softer earnings prospect in view of its lower-than expected unit sales and high exposure to the Japanese Yen which has been trailing at high levels over the past several months, we believe BAUTO may be a safer bet given that its targeted customer base in the middle-income to highincome bracket are less sensitive to the rising cost of living. All in, we believe its investment merits are supported by: (i) high potential value to be unlocked with the proposed listing of its Philippines subsidiary where robust growth in its automotive market is anticipated, (ii) potential dividend pay-out of c.90%, which translate into fair dividend yield of c.7.4%, and (iii) increase of average selling price c.4% for Mazda 2017 variants.

Source: Kenanga Research - 30 Mar 2017