Worse performance for 2QCY17, as 3 out of 5 stocks (BAUTO, MBMR and TCHONG) performed below expectations and the remaining (UMW and DRBHCOM) deemed within expectations as we expect better profitability post demerger of loss-making subsidiaries. Both BAUTO (OP;TP:RM2.40) and

TCHONG (UP;TP:RM1.45) recorded lower-than-expected auto sales volume due to lack of new model launches and less competitive promotional events. On the other hand, although registering stronger auto sales volume, MBMR (MP; TP:RM2.20) experienced lower earnings contribution from its associates (Perodua) due to unfavourable forex, whereas both UMW (MP; TP:RM5.77)

and DRBHCOM’s (MP; TP:RM1.70) earnings were negatively impacted by losses in loss-making subsidiaries (O&G segment and subsidiaries of Proton and Lotus, respectively).

Expecting better performance starting 3QCY17, from the recent strengthening of MYR against USD/JPY. The ringgit strengthened further to around RM4.21/USD level for the month of September 2017 (from RM4.50, end-2016) marking the strongest level reached in the past 9 months, which is already close to our in-house economics team’s year-end target of RM4.15/USD. For comparison, 1QCY17 and 2QCY17 average USD/MYR level was at RM4.45/USD and RM4.33/USD, respectively, which was among the reasons of the worse performance in 1HCY17. On the other hand, for JPY/MYR, although the change is not significant, there are signs of improvement from the high of above RM4.00/100JPY for the year, to RM3.77/100JPY for the month of September. For comparison, 1QCY17 and 2QCY17 average JPY/MYR level was at RM3.91/100JPY and RM3.90/100JPY, respectively which was among the reasons of the worse performance for the 1HCY17.

From all the Auto players under our coverage, UMW (MP;TP:RM5.77) has the largest exposure to USD as all the imported completely knocked down (CKD) kits and completely built up (CBU) are from Thailand and with almost all transactions conducted in USD (every 1% change in USD impacts our FY18E earnings assumption by 4%). Secondly, TCHONG (UP;TP:RM1.45) is estimated to have 80% exposure to USD (of its imported costs where every 1% change in USD impacts our FY18E earnings assumption by 15%). Whereas, BAUTO (OP;TP:RM2.40) has 100% exposure to JPY and is the key beneficiary to the strengthening of JPY with its CBU imports, whereas CKD vehicles are purchased at a fixed rate from 30%- owned MMSB (importer of Mazda CKD) which absorb any changes in JPY/MYR (every 1% change in JPY impacts our FY18E earnings assumption by 7%).

August 2017 TIV sales at 51,720 units (+7% MoM, -1% YoY). The higher MoM car sales was attributed to the promotional campaigns organised by carmakers and fulfilment of back orders with the ‘e-daftar’ system returning to normal operations. On the other hand, YoY car sales was slightly lower due to the extra vigour in the launching event last year especially for the highly anticipated first Perodua sedan, Bezza. Taking a closer look at the passenger vehicles segment (+6% MoM, 0% YoY), in YoY sales terms, Proton registered the highest growth of 45%, due to lower sales base in August 2016 as consumers held back purchases for the launch of the new Persona and Saga in end-August 2016 and end-September 2016, respectively. In MoM sales terms, most of the carmakers show improvement in the numbers attributed to fulfilment of back orders with the ‘e-daftar’ system returning to normal operations with Mazda and Honda registering the highest growth of 13% with attractive promotional deals. For the month of September, sales volume is expected to be around the same level in August, due to the shorter working month and on-going promotional campaigns. Refer to overleaf for YTD 8M17 TIV market share analysis.

YTD 8M17 TIV at 384,730 (+4%), within expectation at 65% of our 590,000 TIV forecast for 2017. 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 continued to lead the pack with an unchanged market share of 36%, nonetheless, with higher sales of 3%, mainly from top selling models such as Axia, MyVi and Bezza. At the number two position, Honda’s performance in 8M17 is a significant improvement from 8M16, with higher sales of 27%, and higher market share of 18% (8M16: 15%) attributed to the introduction of the new variants BR-V (Jan’ 2017), face-lifted City (Mar’ 2017), and City Hybrid (Jul’ 2017). Progressing further down the list, both Proton and Toyota saw increase in sales of 18% and 16%, with higher market share of 13% (8M16:12%) and 12% (8M16:11%), respectively. Key sales driver for Proton was the introduction of the three new variants in August 2016, which are Persona, Saga and Ertiga, whereas, Toyota with its 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 34% and 31%, with lower market share of 5% (8M16:7%) and 2% (8M16:2%), respectively, lacking new car variants to reinvigorate market demand.

BAUTO (OP; TP: RM2.40) 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 with investment merits such as; (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.80%, 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 October 2017.

Source: Kenanga Research - 6 Oct 2017