We maintain our NEUTRAL rating on the AUTOMOTIVE sector given the outweighing of MARKET PERFORM ratings in the total market capitalization of our stocks coverage coupled with the YTD Total Industry Volume (TIV) matching our 2017 TIV forecast. Furthermore, the consumer sentiment gauge has been recovering, hovering at the c.80pts level, nearing the optimistic threshold (>100pts). Additionally, the recent strengthening of the MYR against USD/JPY is expected to show positive effects on automakers with gradual improvement in margin, starting 3QCY17. According to the Malaysian Automotive Association (MAA), TIV for October 2017 registered sales of 47,041 units (+15% MoM, -2% YoY). The stronger MoM car sales were due to longer working month and the commencement of year-end promotional events, whereas the weak YoY car sales was due to the extra vigour in events launching last year. YTD 10M17 TIV of 472,723 units (+1%), came in within expectation, making up 80% of our TIV forecast at 590,000 (+2%). Sales volume for November 2017 is expected to be better than October 2017 due to on-going year-end promotional events and the launch of third-generation Perodua Myvi. We choose BAUTO (OP; TP: RM2.40), 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.80% (c.7.4% dividend yield), and (iii) higher CKD composition with the launch of Mazda CX-5 in October 2017.

October 2017 TIV sales at 47,041 units (+15% MoM, -2% YoY). The stronger MoM car sales was due to longer working month and the commencement of year-end promotional events, whereas the weak YoY car sales was due to the extra vigour in events launching last year especially for the highly anticipated first Perodua sedan, Bezza (Launched end-July 2016) and new Proton Saga (end-September 2016). Taking a closer look at the passenger vehicles segment (+14% MoM, -2% YoY), in YoY sales terms, the negative growth was due to a massive drop in Proton volume by 33% attributed to the lack of new line of vehicles for this year and higher sales base from the launch of new Proton Saga last year. However, this was cushioned by Toyota and Honda, which increased by 12% and 11%, respectively, attributed to “Toyota RM1m Bonanza” promotion (started 1st October 2017), whereas, Honda with its new lines of vehicles such as BR-V (Jan 2017), facelifted City (Mar 2017), face-lifted and Hybrid Jazz (Jun 2017), and City Hybrid (Jul 2017). In MoM sales terms, Toyota took a lead (+44%) with its “Toyota RM1m Bonanza” promotion (started 1st October 2017), followed by Mazda (+41%) with the launch of its bread-and-butter model, Mazda CX-5. Whereas, Nissan (-10%) fared the worst due to lack of new lines of vehicles to invigorate consumer demand. Sales volume for November 2017 is expected to be better than October 2017 due to on-going year-end promotional events and the launch of third generation Perodua Myvi.

YTD 10M17 TIV of 472,723 units (+1.4%), within expectation of our TIV forecast at 590,000 (+1.7%). We attributed the stronger YTD growth to the aggressive discounts and promotion for the purpose of inventory clearing of older line of vehicles, coupled with the roll-out of the new line of vehicles. Perodua continued to lead the pack with slightly lower market share at 35% (10M16:36%) and flattish sales growth. However, higher sales are expected with the launch of its third generation Perodua Myvi in November 2017. At the number two position, Honda’s performance in 10M17 is a significant improvement from 10M16, with higher sales of +23%, and higher market share of 18% (10M16: 15%) attributed to the introduction of the new BR-V (Jan 2017), face-lifted City (Mar 2017), face-lifted and Hybrid Jazz (Jun 2017), and City Hybrid (Jul 2017). Progressing further down the list, both Toyota and Proton saw increase in sales of 11% and 6% with market share of 12% (10M16:11%) and 13% (10M16:13%), respectively. Key sales driver for Proton was the introduction of the three new variants in August 2016 namely Persona, Saga and Ertiga, whereas Toyota was driven by 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 32% and 28%, with market share of 5% (10M16:7%) and 2% (10M16:2%), respectively, as both players lacked new car variants to reinvigorate market demand. Mazda is expected to garner improvement in volume starting October 2017 onwards, with the launch of its bread-and-butter model of the new CKD Mazda CX-5, whereas Nissan is expected to continue seeing downtrend in sales growth for the rest of the year with no indication of new significant models to improve volume.

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.7.4%, and (iii) higher CKD composition with the launch of Mazda CX-5 in October 2017.

Source: Kenanga Research - 20 Nov 2017