We maintain our NEUTRAL rating on the AUTOMOTIVE sector. This stance is backed by the improvement in MIER consumer sentiment gauge, which peaked at 82.6 pts for 2017 (+5.5 pts QoQ, +12.8 pts YoY), inching towards the optimistic threshold (>100pts). Based on the latest BNM data, the loan approval rate for passenger cars has been hovering below the comfortable threshold of c.60% but still within the 5-year loan approval rate average of c.55%. For 4QCY17, we saw mixed performance and expect slower sequential 1QCY18 car sales with the absence of sales boosting year-end promotional activity and further dragged down by the slower sales from car-makers that did not launch any new models in the quarter. According to the MAA, TIV for 2M18 was at 85,153 units (-2%) with Perodua (+13%) and Mazda (+83%) recording the highest car sales growth supported by their respective all-new Perodua Myvi and all-new Mazda CX-5. Nonetheless, we maintain our 2018 year-end estimate at 590,000 units (+2%) as we reiterate our 2018 theme of value-for-money sales (focusing on affordable car variants) and segmental targeted sales (focusing on the SUV segment). Our top pick for the sector is MBMR (OP; TP: RM2.85), with or without an M&A angle, for its deep value stake in 22.58%-owned Perodua and expected strong turnaround for its alloy-wheel division with the all-new Perodua Myvi and expected launch of the all-new Perodua SUV (D38L). We also like BAUTO (OP; TP:RM2.30) for its solid earnings recovery with the launching of its flagship model, the all-new Mazda CX-5 and backed by its existing superior profit margins.

Mixed performance in 4QCY17 despite the usual sales boosting yearend promotion, as we have 1 stock out of the 6 stock, MBMR (OP;TP RM2.85) above expectation while 3 stocks, DRBHCOM (MP;TP:RM2.50), SIME (MP;TP:RM2.70) and TCHONG (MP;TP:RM1.80) were within expectations and the remaining 2 stocks, BAUTO (OP;TP RM2.30) and

UMW (MP;TP:RM6.25) were below expectations. In 4QCY17 we observed; (i) slower car sales for DRBHCOM and TCHONG due to the lack of new model launches for Proton and Nissan brands, respectively; (ii) BAUTO car sales was stronger in 3Q18 with the full quarterly contribution of the all-new Mazda CX-5, however, 9MFY18 was held back by the lower margin outgoing Mazda CX-5 run-out programme; (iii) MBMR and UMW scored higher car sales due to a better promotional activity, higher sales of premium vehicles and higher profit contribution from Perodua all-new third generation Myvi.

Tepid car sales in 1QCY18. We expect overall car sales to slow down in 1QCY18 with the absence of sales boosting year-end promotional activity and further dragged down by the slower sales from the car-makers that did not launch any new models during the quarter. Nonetheless, specifically, we expect BAUTO sales to gain traction with the higher delivery of its flagship model, the all-new Mazda CX-5 from the local market as well as from the commencement of the all-new Mazda CX-5 export to Thailand, Indonesia, Philippines and Cambodia. Subsequently, we expect MBMR (with its 22.58%-owned effective stake) and

UMW (with its 38%-owned interest) to benefit from the strong reception of the all-new Perodua MyVi. Note that, currently, the allnew Perodua Myvi bookings have hit 68k, with 28k units delivered, and we understand that the waiting list is up to 3 months due to higher-than-expected take-up rate for its higher-end variants. On the other hand, DRBHCOM is waiting for the all-new Proton/Geely Boyue, expected to be launched in the 2H18/1H19. However, we expect TCHONG to continue its weak performance given the lack of new model launches while SIME is still banking on its world share of BMW vehicles, currently at 2.5% of total BMW global sales and maintain its position as the world second largest BMW dealer.

Perodua leading with 41% market share for 2M18. According to the Malaysian Automotive Association (MAA), TIV for 2M18 was at 85,153 units (-2%). Perodua continued to lead the pack with a higher market share at 41% (2M17:35%) and higher sales growth (+13% YoY) driven by higher deliveries of the all-new Perodua Myvi. Note that, currently, the all-new Perodua Myvi bookings have hit 68k, with 28k units delivered. At the number two position, Honda registered slightly lower market share of 18% (2M17:19%) with a lower sales growth (-7% YoY) as most of the new launches for Honda was registered in the 2Q17 and we believe that consumers held back purchases in anticipation of new launches in the same time period (on expectations of the launching of the face-lifted Honda HR-V). Going further down the list, Toyota saw a significant decline in sales (-36% YoY) with a lower market share of 9% (2M17:12%) as consumers held back purchases in anticipation of the all-new Toyota CH-R and allnew Toyota Rush as well as face-lifted variants of its best-selling models of Vios, Hilux and Innova. On the other hand, Proton (- 35% YoY) and Nissan (-10% YoY) continued to slide further down the pecking order with a lower market share of 10% (2M17:15%) and 4% (2M17:4%), respectively. Mazda sales surged 83%, and subsequently registered a higher market share of 2% (2M17: 1%) attributed to the higher delivery of its flagship model, all-new Mazda CX-5.

We maintain our TIV estimates at 590,000 units (+2%) as we reiterate 2018 theme of value-for-money sales and segmental targeted sales. Value-for-money sales will be focusing on the affordable variants led by Perodua (Axia, Myvi, Bezza, and Alza), followed by Honda (with its entry-level Hybrid segment, Jazz and City Sport Hybrid, as well as entry-level SUV segment, the BR-V). However, for the third place, there will be a competition between Proton (Saga, Persona and Exora) and Toyota (Vios, Hilux and Innova) with only a 1% difference in market share; whereas, for segmental targeted sales, 2018 will be the year of SUV segment led by the most anticipated introduction of Proton-Geely Boyue in 2H18/1H19, all-new Perodua SUV (D38L), all-new Toyota C-HR, 2018 Toyota Rush, all-new Mazda CX-8 and supported by the existing models of Mazda (all-new CX-5 and CX-3) ,Honda (BR-V, HR-V and CR-V) and Nissan (X-Gear and X-Trail). Note that, the all-new third generation Perodua Myvi (priced at RM44,300 to RM55,300) is viewed as the most affordable car variants with advanced technologies (Advanced Safety Assist (ASA) and pre-built SmartTag toll reader) rivalling the non-national brands at double the price. The all-new Perodua Myvi is expected to be the number 1 selling hatchback car models in 2018 which is expected to overtake the competition in the same segment (Proton Iriz, Honda Jazz, Mazda 2 Hatchback, Kia Rio, Ford Fiesta, Volkswagen Polo, and Peugeot 208).

MBMR (OP; TP: RM2.85) is our top pick for the sector with or without an M&A angle, for; (i) its deep value stake in 22.58%- owned Perodua (based on our FY18E profit and attached 12x PER value, MBMR’s stake at c.RM908.7m), (ii) expected strong turnaround in the alloy-wheel division segment underpinned by the all-new MyVi and expected launch of the all-new Perodua SUV (D38L), and (iii) a stronger MYR. The stock is trading at an undemanding 9.4x FY18E PER compared to 5-year forward average of 11x. We also like BAUTO (OP; TP: RM2.30) for its; (i) solid earnings recovery with the launching 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 of c.2%), and (iii) steady dividend yield of 4.6% with its net cash position, which accounts for 7% of market capitalisation and strong 5% FCFE yield (FY18E).

Source: Kenanga Research - 6 Apr 2018