We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the lack of re-rating catalyst for 2017 as automobiles purchases have been clamped by stringent lending guidelines as well as consumer sentiment lingering at level below the optimistic threshold (i.e. <100 pts) on higher living expenses. Additionally, the recent strengthening of the MYR against USD/JPY is still insufficient to cushion the negative impacts on automakers. According to MAA, TIV for May 2017 registered sales of 50,600 units (+18% MoM, +13% YoY). The improvement in car sales for both MoM and YoY was attributed to aggressive pre-Hari Raya Aidilfitri festive season promotion, as well as more attractive line-ups. YTD 5M17 TIV of 234,186 units (+7%), came in within expectation, making up 40% of our 2017 TIV forecast of 590,000. We believe strong sales momentum should continue for the remainder of the year as highly anticipated model launches will be available in the market. We choose BAUTO (OP; TP: RM2.05), 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.8.4% div. yield), and (iii) increase of average selling price of c.4% for Mazda 2017 variants

Lacklustre performance for 1QCY17. For the quarter, 2 out of 5 stocks under our coverage, namely, MBMR and UMWH, reported results, which came in within our expectations. Both companies registered stronger auto sales volume; however, UMWH’s earnings were negatively impacted by the losses in O&G segments, while earnings contribution from associate MBMR was lower from its usual high-growth pattern. Meanwhile, BAUTO, TCHONG and DRBHCOM were below expectations, attributed to the lower auto sales volume from the lack of new model launches to attract consumer attention. We revised down our TP on MBMR (MP) to RM2.40 from RM2.55, and TCHONG (UP) to RM1.70 from RM1.80 on expectation of lower associates’ contribution and lower auto sales, respectively. We upgrade BAUTO (TP:RM2.05) to OUTPERFORM from MARKET PERFORM as its recent fall in its share price offers an attractive proposition with a potential total return of more than 10%. We made no changes to UMWH (MP; TP:RM5.77) and DRBHCOM (MP; TP:RM1.85). May 2017 TIV sales at 50,600 units (+18% MoM, +13% YoY). The improvement in car sales for both MoM and YoY was attributed to aggressive pre-Hari Raya Aidilfitri festive season promotion, as well as more attractive line-ups in the current month.

Taking a closer look at the passenger vehicles segment (+20% MoM, +17% YoY), in YoY sales terms, Honda and Proton registered growth of 62% and 42%, respectively, on the back of aggressive promotion by Proton (Stay safe & save with Proton) and amazing reception of the new Honda line of vehicles, primarily, the new Honda Civic, the new Honda BRV and face-lifted Honda City. In MoM sales terms, most of the car-makers recorded higher sales from the aggressive pre-Raya festive season promotion with Nissan registering the highest growth of 29%, with its attractive 60th anniversary deals. The only underperformers in MoM sales terms was Mazda, which has fallen by 10%, attributed to higher unit sales base in April 2017 from the introduction GVC variants (Mazda 3, Mazda 6, and Mazda CX-3), and attractive incentives promotion on 2016 Mazda CX-5.

YTD 5M17 TIV came in stronger at 234,186 (+7%), led by Perodua and Honda with a market share of 35% 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, Proton Saga, Proton Persona, Proton Ertiga, the face-lifted Toyota Vios, Toyota Innova, Toyota Corrolla Altis, Honda Civic, Honda BRV, face-lifted Honda City, Nissan X-trail, Mazda MX-5, Mazda 3 GVC, Mazda 6 GVC, and Mazda CX-3 GVC. We made no changes to our year-end forecast as we believe our target of 590,000 is achievable with more robust sales in months to come with the forthcoming model launches such as the new 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 CX-5 2017 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 consumer sentiment lingering at level below the optimistic threshold (i.e. <100 pts) on higher living expenses. Additionally, the recent strengthening of the MYR against USD/JPY is still insufficient to cushion the negative effects on the automakers’ business.

BAUTO (OP; TP: RM2.05) is our preferred pick for the sector. Our sensitivity analysis suggested that for every 1% fluctuation of MYR vs 100 JPY from our base rate assumption of RM3.92/100 JPY, the fluctuation will affect BAUTO’s FY18E bottom-line by 7%. Further, with high exposure to the Japanese yen through its completely built-up (CBU) variants, which entail c.58% of the units sold, BAUTO may be at an advantage from the recent strengthening of MYR against JPY. Moving forward, we estimated that MYR will improve by c4% to RM3.75 (FY17:3.92) against JPY, translating into FY18E net profit growth of 62%, on top of attractive line ups slated for the year. (Mazda MX-5, Mazda 3 GVC, Mazda 6 GVC, Mazda CX-3 GVC, Mazda CX-5 2017 and Mazda CX-9). All in, we believe BAUTO may be a safer bet given that its targeted customer base in the middle-income to high-income bracket is less sensitive to the rising cost of living and 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.8.4%, and (iii) increase of average selling price of c.4% for Mazda 2017 variants.

Source: Kenanga Research - 7 Jul 2017