We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the lack of re-rating catalyst for 2017 as automobile 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 June 2017 registered sales of 50,275 units (-1% MoM, -12% YoY). The slump in car sales for both MoM and YoY was attributed to the shorter working month due to Hari Raya festive holidays. Sales volume for July 2017 is expected to be maintained at June 2017 level with anticipation of delays in the process of vehicle registrations due to uncertainties arising from the liberalisation of motor insurance from July 2017. YTD 6M17 TIV of 284,461 units (+3%), came in within expectation, making up 48% of our 2017 TIV forecast of 590,000. We choose BAUTO (OP; TP: RM2.05), as our preferred pick for the sector, backed by 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.7.5% div. yield), and (iii) higher CKD composition with the forthcoming launch of Mazda CX-5 slated for September 2017.

June 2017 TIV sales at 50,275 units (-1% MoM, -12% YoY). The slump in car sales for both MoM and YoY was attributed to a shorter working month due to the Hari Raya festive holidays. Taking a closer look at the passenger vehicles segment (0% MoM, -11% YoY), in YoY sales terms, only Proton registered positive growth of 4%, on the back of aggressive promotion by Proton (i.e. Stay safe & save with Proton). In MoM sales terms, most of the car makers recorded mild growth in sales due to higher unit sales base in the previous month from the aggressive pre-Raya promotion with Nissan registering the highest growth of 7%, with its attractive 60th anniversary deals. The underperformers in MoM sales terms were Toyota and Mazda with sales falling by 12% and 9%, respectively, as the consumers were holding back purchases for the new models expected to be unveiled in the second half of the year. Sales volume for July 2017 is expected to be maintained at June 2017 level with anticipation of delays in the process of vehicle registrations due to uncertainties arising from the liberalisation of motor insurance from July 2017.

YTD 6M17 TIV came in stronger at 284,461 (+3%), led by Perodua and Honda with market share of 35% and 18%, respectively. We attributed the stronger YTD growth to the aggressive discounts and promotion for the purpose of inventory clearing of 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.

YTD 6M17 TIV comprised 48% 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 of 590,000 is achievable with more robust sales in the months to come with the forthcoming model launches such as the new Perodua Myvi, face-lifted Perodua Bezza, Honda City Hybrid, 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.

Motor Tariff Liberalisation kick-off on 1st July 2017, no more on-the road pricing. With the phased liberalisation of the motor tariff to kick off on 1st July 2017, insurance companies will be given some freedom to price the premiums. The phased liberalisation will begin for Comprehensive and Third Party Fire and Theft classes. Premiums to be charged for these classes will be based on the risk profiles of vehicle owner or the vehicle itself. This will result in an open market with competitive pricing. Consumers will have the freedom to shop around for the best price based on their individual insurance needs. Insurance companies will also be allowed to offer additional products attached to the motor policies for consumers to pick and select what they need from the array of new products. With this insurance liberalisation, cars will be sold separately from the insurance policies.

BAUTO (OP; TP: RM2.05) is our preferred pick for the sector. 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.7.5%, and (iii) higher CKD composition with the forthcoming launch of Mazda CX-5 slated for September 2017.

Source: Kenanga Research - 25 Jul 2017