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. According to MAA, TIV sales for March 2017 registered at 53,717 (+27% MoM, +10% YoY). We attribute the stronger MoM growth to the longer working month in March as compared to February 2017 (due to seasonal holidays). Meanwhile, the YoY TIV grew stronger on the back of more attractive line-ups in March 2017 (spill-over from 2H16) as well as aggressive promotional activities. Driving around 2017, in view of higher living expenses, we believe consumers may continue to limit their 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 a lack of re-rating catalysts to bring about any significant shift in the sector. We maintain our 2017 TIV forecast of 590,000 (+1.7%) which represents a 24% growth from YTD TIV of 140,839 units. Recently, The Royal Malaysian Customs Department issued a federal gazette on the enforcement of Excise Duties Order 2017 (effective 1st April 2017). Subsequently, the authorities issued another announcement dictating a reversal in the excise duty hike on budget MPVs to its original 60% after taking into account the high demand for such vehicles (effective 13th April 2017). As a result, excise duties for all vehicles remain unchanged. 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.7.2% div. yield), and (iii) increase of average selling price of c.4% for Mazda 2017 variants.

March 2017 TIV came in stronger at 53,717 (+27% MoM, +10% YoY). We attribute the stronger MoM growth to the longer working month in March as compared to February 2017 (due to seasonal holidays). Meanwhile, the YoY TIV grew stronger on the back of more attractive line-ups in March 2017 (spillover from 2H16) as well as aggressive promotional activities. Taking a closer look at the passenger vehicles segment (+24% MoM, +12% YoY), Honda and Toyota surged substantially by 48% and 45%, respectively, which we believe was mainly driven by new line of vehicles, primarily, the face-lifted Toyota Vios, the new Toyota Innova, the new Honda Civic, the new Honda BRV and face-lifted Honda City. On the outperformers in MoM sales terms, Mazda registered the highest growth of 80% to 806 units, attributed to the inventory clearing of Mazda 2016 variants before the roll-out of Mazda 2017 variants in April 2017, which was affected by the increase in average selling price of c.4%. On the underperformers in MoM sales terms, both Nissan and Proton registered flat growth due to lack of new model launches to attract consumer attention.

Small number of launches. Driving around 2017, in view 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 re-rating catalysts to bring about any significant shift in the sector. That 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, face-lifted Toyota Camry, Mazda MX-5, face-lifted Mazda 3, Mazda CX-5 and Mazda CX-9. We keep our 2017 TIV forecast of 590,000 (+1.7%) unchanged for now. The YTD TIV of 140,839 units currently represents 24% of the forecast.

Excise Duties Order 2017. Recently, The Royal Malaysian Customs Department issued a federal gazette on the enforcement of Excise Duties Order 2017 (effective 1st April 2017). Subsequently, the authorities issued another announcement dictating a reversal in the excise duty hike on budget MPVs (below 1.5 litre) to its original 60% (from 65% in the first Announcement) after taking into account the high demand for such vehicles (effective 13th April 2017). As a result, excise duties for all vehicles remain unchanged. There are a few models categorised under budget MPV, which are Honda BR-V, Toyota Sienta, Toyota Avanza, Toyota Rush, Perodua Alza, and Proton Ertiga. Post-first announcement by the authorities, UMWH (UP: TP RM5.77)

announced a price increase for its three models namely Avanza, Sienta and Rush. Nonetheless, UMWH had reverted back the price hike decision after the second announcement by the authorities.

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 who 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.7.2%, and (iii) increase of average selling price of c.4% for Mazda 2017 variants.

Source: Kenanga Research - 20 Apr 2017