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 the 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 July 2017 registered sales of 48,553 units (-3% MoM, +14% YoY). The lower MoM car sales was attributed to post Hari Raya holidays, as well as technical glitches in the “e-daftar” system which affected the registration process of vehicles. On the other hand, YoY car sales was higher with more attractive line of vehicles as compared to previous year. Sales volume for August 2017 is expected to be higher than July 2017 level in view of on-going promotional campaigns and expected fulfilment of back orders following the expected recovery of the “e-daftar” system. YTD 7M17 TIV of 333,010 units (+5%), came in within expectation, making up 56% 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 is expected, (ii) potential dividend pay-out of c.90% (c.7.7% dividend yield), and (iii) higher CKD composition with the forthcoming launch of Mazda CX-5 slated for September 2017.

July 2017 TIV sales at 48,553 units (-3% MoM, +14% YoY). The lower MoM car sales was attributed to post Hari Raya holidays, as well as technical glitches in the “e-daftar” system which affected the registration process of vehicles. On the other hand, YoY car sales was higher with more attractive line-up of vehicles as compared to previous year. Taking a closer look at the passenger vehicles segment (-4% MoM, +16% YoY), in YoY sales terms, Proton registered the highest growth of 54%, due to lower sales base in July 16 as the consumers held back the purchases for the launch of the new Persona and Saga in August 2016 and September 2016, respectively. In MoM sales terms, Perodua registered the highest growth of 6%, with the top-selling models of Axia, MyVi and Bezza, and attractive promotion deals. The underperformers in MoM sales terms were Proton and Mazda with sales falling by 18% and 13%, respectively. The negative growth was mostly due to the end of Proton ‘Stay Safe & Save’ campaign for Hari Raya, whereas for Mazda, the consumers were holding back purchases in anticipation of new CX-5 models, expected to be unveiled in September 2017. Sales volume for August 2017 is expected to be higher than July 2017 level in view of on-going promotional campaigns and expected fulfilment of back orders following the expected recovery of the “e-daftar” system.

YTD 7M17 TIV came in stronger at 333,010 (+5%). 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 remainder of the year. Perodua continues to lead the pack with slightly lower market share of 35% (7M16:36%); nonetheless, with higher sales of 5%, mainly from top selling models of Axia, MyVi and Bezza. At number 2 position, Honda’s performance in 7M17 is a significant improvement from 7M16, with higher sales of 29%, and higher market share of 18% (7M16: 16%) attributed to the introduction of the new variants of 10th Gen Civic, BR-V and face-lifted City. Progressing further down the list, both Proton and Toyota saw increase in sales of 15% and 25%, with higher market share of 14% (7M16:12%) and 12% (7M16:11%), respectively. Key sales driver for Proton was from the introduction of the three new variants in August 2016, which are Persona, Saga and Ertiga, whereas, Toyota with the top-selling models of Vios, Hilux and Innova. On the other hand, brands that didn’t fare so well were Nissan, and Mazda, with both facing sales decline of 43% and 31%, with lower market share of 5% (7M16:7%) and 2% (7M16:2%), respectively, lacking new car variants to reinvigorate market demand.

YTD 7M17 TIV comprised 56% 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 supported by the forthcoming model launches such as the replacement for Perodua Myvi, Honda City Hybrid, Honda Jazz Hybrid, Honda CRV, the new Toyota CH-R, Toyota Hilux 2.4G, Toyota Vios 2017, face-lifted Toyota Camry, Mazda CX-5 2017 and Mazda CX-9. 

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.7.7%, and (iii) higher CKD composition with the forthcoming launch of Mazda CX-5 slated for September 2017.

Source: Kenanga Research - 21 Aug 2017