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 for April 2017 registered sales of 42,746 units (-20% MoM, +1% YoY). The decline in MoM sales was attributed to the higher level of purchases in March, following the aggressive discounts and promotion. At the same time, we believe consumers were also withholding their purchases in anticipation of new model launches in the second half of the year. Meanwhile, the YoY TIV grew marginally despite more attractive line-ups in April 2017 as well as aggressive promotional activities. YTD 4M17 TIV of 183,586 units (+6%), came in within expectation, making up 31% of our 2017 TIV forecast of 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.7.3% div. yield), and (iii) increase of average selling price of c.4% for Mazda 2017 variants.

April 2017 TIV sales at 42,746 units (-20% MoM, +1% YoY). The decline in MoM sales was attributed to the higher level of purchases in March, following the aggressive discounts and promotion with the purpose of inventory clearing as well as a rush for deliveries by companies having a financial year ending March 31st. At the same time, we believe consumers were also withholding their purchases in anticipation of new model launches in the second half of the year. Meanwhile, the YoY TIV grew marginally despite more attractive line-ups in April 2017 as well as aggressive promotional activities.

Taking a closer look at the passenger vehicles segment (-22% MoM, 0% YoY), in YoY sales terms, Proton and Honda registered growth of 25% and 22%, respectively on the back of aggressive promotion by Proton (The Amazing 5 value) and amazing reception of the new Honda line of vehicles, primarily, 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 20%, attributed to the inventory clearing of Mazda 2016 variants before the deliveries of Mazda 2017 variants in May 2017 (higher average selling price of c.4%). On the underperformers in MoM sales terms, Honda and Perodua have fallen by 34% and 26% due to higher level of deliveries in March from the face-lifted Honda City and face-lifted Perodua Axia.

YTD 4M17 TIV came in stronger at 183,586 (+6%), led by Perodua and Honda with a market share of 38% and 19% respectively. We attributed the stronger YTD growth to the aggressive discounts and promotion for the purpose of inventory clearing of the older models before the roll out of the newer models anticipated in the second half of the year. In addition, the stronger numbers were also contributed by the wide variety of new model launches, such as the face-lifted Perodua Axia, the new Proton Saga, the new Proton Persona, Proton Ertiga, the face-lifted Toyota Vios, the new Toyota Innova, the new Toyota Corrolla Altis, the new Honda Civic, the new Honda BRV and face-lifted Honda City. Toyota and Honda remained the outperformers with the highest YTD growth of 56% and 40% respectively due to its wide variety of new models, as well as aggressive promotion. Whereas, Nissan and Mazda continued to be the underperformers due to lack of new models launches to attract consumer attention.

YTD 4M17 TIV comprised 31% of our 590,000 TIV forecast for 2017, and within expectation. We made no changes to our year-end forecast as we believe our target is achievable with more robust sales in months to come with the forthcoming model launches such as the face-lifted Perodua Myvi, face-lifted Perodua Bezza, Honda Jazz Hybrid, Honda CR-V, the new Toyota CH-R, Toyota Hilux 2.4G, Toyota Vios 2017, face-lifted Toyota Camry, Mazda MX-5, face-lifted Mazda 3, Mazda CX-5 and Mazda CX-9. 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. Additionally, the recent strengthening of the MYR against USD/JPY is still insufficient to cushion the negative effects of the Automakers’ business.

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, we believe BAUTO may be a safer bet given that its targeted customer base in the middle-income to high-income bracket that 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 translates into fair dividend yield of c.7.3%, and (iii) increase of average selling price of c.4% for Mazda 2017 variants.

Source: Kenanga Research - 23 May 2017