We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The Neutral view is backed by the improvement in consumer sentiment gauge compiled by Malaysia Institute of Economic Research, hovering at the c. 80pts-level in 3Q17, the highest in five quarters and inching towards the optimistic threshold (>100pts). Additionally, the recent strengthening of the MYR against USD/JPY is expected to continue showing positive effects on automakers with gradual improvement in margin. Besides, the YTD Total Industry Volume (TIV) has also matched our 2017 TIV forecast. According to the Malaysian Automotive Association (MAA), TIV for November 2017 registered sales of 49,184 units (+5% MoM, 0% YoY). The stronger MoM car sales were attributed to the usual year-end promotional events and maiden contribution from the launch of all-new third-generation Perodua Myvi. That said, on YoY-basis, TIV was generally lower due to the lack of new line of vehicles from Proton and Nissan for this year. YTD 11M17 TIV reached 521,907 units (+1%), which came in within expectation, making up 88% of our TIV forecast at 590,000 (+2%). Sales volume for December 2017 is expected to be the highest compared to other months owing to the last sprint in year-end promotional events and higher registration for the all-new thirdgeneration Perodua Myvi (launched in mid-Nov). We choose BAUTO (OP; TP: RM2.30), as our preferred pick for the sector, backed by investment merits of: (i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders against industry peers (average profit margins of c.8% versus peers average at c.2%), and (iii) steady dividend yield of 5.1% with its net cash position, which accounts for 8% of market cap and strong 6% FCFE yield (FY18E).

November 2017 TIV sales at 49,184 units (+5% MoM, 0% YoY). The stronger MoM car sales were attributed to the on-going year-end promotional events and maiden contribution from the launch of all-new third-generation Perodua Myvi. Taking a closer look at the passenger vehicles segment (+4% MoM, -1% YoY), the negative YoY sales was due to a massive drop in Nissan and Proton volume by 41% and 34%, respectively due to the lack of new models for this year. However, this was cushioned by Mazda and Honda, which increased by 26% and 18%, respectively, attributed to the launch of the all-new Mazda CX-5 CKD and Honda with new models such as BR-V (Jan 2017), face-lifted City (Mar 2017), face-lifted and Hybrid Jazz (Jun 2017), and City Hybrid (Jul 2017). In MoM sales terms, Honda took a lead (+16%) with its attractive lines of vehicles, followed by Toyota (+6%) with its “Toyota RM1m Bonanza” promotion (started 1st October 2017). Whereas, Proton (-5%) and Nissan (-3%) fared the worst due to lack of new lines of vehicles to invigorate consumer demand. Sales volume for December 2017 is expected to be the highest compared to other months owing to the last sprint in year-end promotional events and higher registration for the all-new third-generation Perodua Myvi (launched in mid-Nov).

YTD 11M17 TIV of 521,907 units (+1.3%), 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 new models. Perodua continued to lead the pack with an unchanged market share at 35% (11M16:35%) and flattish sales growth. However, higher sales are expected with the higher registration of its all-new third generation Perodua Myvi in December 2017. At the number two position, Honda’s performance in 11M17 is a significant improvement from 11M16, with higher sales of 22%, and higher market share of 19% (11M16:16%) mainly due to the introduction of new models as mentioned earlier. Progressing further down the list, both Toyota and Proton saw increase in sales of 10% and 2% with market share of 12% (11M16: 11%) and 13% (11M16: 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 24% with market share of 4% (11M16: 7%) and 2% (11M16: 2%), respectively. Mazda has started to recoup its losses in volume with the introduction of the all-new CKD Mazda CX-5 at end-October 2017, 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 boost volume.

BAUTO (OP; TP: RM2.30) 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) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders against industry peers (average profit margins of c.8% as compared to peers average at c.2%), and (iii) steady dividend yield of 5.1% with its net cash position, which accounts for 8% of market cap and strong 6% FCFE yield (FY18E).

Source: Kenanga Research - 20 Dec 2017