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. 80ptslevel in 4Q17, the highest in 12 quarters and inching towards the optimistic threshold (>100pts). Additionally, the recent strengthening of the MYR against USD and JPY is expected to continue showing positive effects on automakers with gradual improvement in margin. According to the Malaysian Automotive Association (MAA), TIV for December 2017 registered sales of 54,729 units (+11% MoM, -16% YoY). The stronger MoM car sales were attributed to the usual year-end promotional events and higher registration of the all-new third-generation Perodua Myvi. That said, on YoY-basis, TIV growth was partly submerged by the floods in certain parts of Peninsular Malaysia as well as higher sales base from extra vigour in promotion and launching events last year. Subsequently, 2017 TIV came in lower at 576,635 units (-1%), which fell short of expectation at 97% of our TIV forecast at 590,000 (+2%). Note that, the TIV was inline with our expectation until YTD 11M17. Sales volume for January 2018 is expected to be lower than December 2017 with the termination of year-end promotional events and recovery period from the floods. Therefore, we cut our 2018 year-end target to 590,000 units (+2%) (from 600,000 units, previously), in line with MAA’s current 2018 TIV target of 590,000 units. 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% with its net cash position, which accounts for 8% of market cap and strong 6% FCFE yield (FY18E).

December 2017 TIV sales at 54,729 units (+11% MoM, -16% YoY). The stronger MoM car sales were attributed to the usual year-end promotional events and higher registration of the all-new third-generation Perodua Myvi.

That said, on YoY-basis, TIV was submerged by the floods in certain parts of Peninsular Malaysia as well as higher sales base from extra vigour in promotion and launching events last year. Taking a detailed look at the passenger vehicles segment (+11% MoM, -17% YoY), negative YoY sales was contributed by the lower sales across the board due to the aforementioned. In MoM sales terms, Perodua took a lead (+21%) with its all-new Perodua Myvi, followed by Toyota (+11%) with its “Toyota RM1m Bonanza” promotion (started 1st October 2017). On the other hand, Mazda (-30%) fared the worst due to slower deliveries of vehicles attributed to the higher take-up rate for its premium Soul Red Crystal colour for its all-new Mazda CX-5. Whereas, Proton registered flat growth due to the lack of new lines of vehicles to invigorate consumer demand.

2017 TIV came in lower at 576,635 units (-0.6%). The 2017 TIV was below expectation at 97% of our TIV forecast at 590,000 units (+1.7%). We attributed the lower 2017 TIV growth to the lower-than-expected December sales (Dec 2017 volume at 9% of the total TIV from average December sales of 11%) due to the above-mentioned reasons. Sales volume for January 2018 is expected to be lower than December 2017 with the termination of year-end promotional events and recovery period from the floods. Therefore, we cut our 2018 year-end target to 590,000 units (+2.3%) (from 600,000 units, previously), in line with MAA’s current 2018 TIV target of 590,000 units (from 619,000 units, previously).

Perodua still in the lead. Perodua continued to lead the pack, albeit with a lower market share at 35% (2016:36%) and lower sales growth (-1%) due to late launching of the all-new Perodua Myvi (in mid-Nov 2017) compared to the early launch of Perodua Bezza in Jul 2016. Note that, currently, the all-new Perodua Myvi bookings have hit 36k, with 11k units delivered. At the number two position, Honda’s performance in 2017 is a significant improvement from 2016, with higher sales by 19%, and higher market share of 19% (2016:16%) mainly due to the introduction of new models namely 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, Toyota saw an increase in sales of 9% with higher market share of 12% (2016:11%) driven by its top-selling models such as Vios, Hilux and Innova. On the other hand, brands that didn’t fare so well were Nissan, Mazda and Proton, facing sales decline of 35%, 22%, and 2% with market share of 5% (2016: 7%), 2% (2016: 2%), and 12% (2016:12%), 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 and Proton are expected to continue showing depressed volume 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% with its net cash position, which accounts for 8% of market cap and strong 6% FCFE yield (FY18E).

Source: Kenanga Research - 24 Jan 2018