We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for May 2018 registered sales of 42,983 units (-9% MoM, -15% YoY). The weaker car sales MoM and YoY were attributed to consumers holding back purchases prior to the implementation of zero-rated Goods & Services Tax (GST) effective 1st June 2018, which saw an average 6% reduction in car price across the board. Nonetheless, YTD 5M18 TIV of 225,212 units (-4%) is still within expectation at 38% of our TIV forecast at 590,000 (+2%). Going forward, sales volume in June 2018 is expected to be higher than May 2018, following the implementation of zero-rated GST on 1st June 2018 (estimated average c.6% reduction in car price) as well as supported by the Hari Raya festive season promotional campaigns. Over the next three months, sales volume until August 2018 is expected to be boosted by this zero-rated GST tax holiday transition period until the new SST is gazetted (expected on 1st September 2018), which may see a hike in car prices depending on the new mechanism. Our top pick for the sector is MBMR (OP; TP: RM3.30), 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 turn-around in its 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 8.9x FY18E PER compared to the 5-year forward average of 11x.

May 2018 registered sales of 42,983 units (-9% MoM, -15% YoY). The weaker car sales both MoM and YoY were attributed to consumers holding back purchases prior to the implementation of zero-rated Goods & Services Tax (GST) on 1st June 2018, which saw at an average 6% reduction in car prices across the board. Taking a detailed look at the passenger vehicles segment (-4% MoM, -11% YoY), both lower MoM and YoY sales were attributed to the weaker car sales across the board, except for Perodua (+10% MoM, +28% YoY) which still stood strong from the front-loaded booking of all-new Perodua Myvi, whereas Nissan’s (+58% MoM, -15% YoY) strong MoM sales was from the front-loaded booking of all-new Nissan Serena S-Hybrid, which was launched in early May 2018.

Zero-rated GST starting 1st June 2018 to boost car sales. Sales volume for June 2018 is expected to be higher than May 2018, following the implementation of zero-rated GST on 1st June 2018 (at an average of c.6% reduction in car prices) as well as supported by the Hari Raya festive season promotional campaigns. Furthermore, sales volume until August 2018 is expected to be boosted by the zero-rated GST tax holiday transition period until the new SST is gazetted (expected on 1st September 2018), which may increase car prices across the marques depending on the new mechanism.

Perodua leading with record high of 43% market share. Perodua continued to lead the pack with a market share of 43% (5M17:35%) and higher sales growth (+19% YoY) driven by higher deliveries of the all-new Perodua Myvi. Note that, currently, the all-new Perodua Myvi bookings have hit 70k, with 38k units delivered. At the number two position, Honda registered lower market share of 18% (5M17:19%) with a lower sales growth (-9% YoY) as consumers held back purchases in anticipation of new launches in 2H18 (on expectations of the face-lifted Honda HR-V). Progressing further down the list, Toyota saw a significant decline in sales (-29% YoY) with a lower market share of 9% (5M17:12%) as consumers held back purchases in anticipation of the all-new Toyota Rush and face-lifted variants of its best-selling models Vios and Innova. On the other hand, Proton (-35% YoY) and Nissan (-17% YoY) continued to slide further down the pecking order with a lower market share of 9% (5M17:14%) and unchanged market of 4% (5M17:4%), respectively, due to the lack of new volume-driven model launches. Meanwhile, Mazda’s sales surged 31%, with an unchanged market share at 2% (5M17: 2%) attributed to the higher delivery of its flagship model, the all-new Mazda CX-5.

MBMR (OP; TP: RM3.30) is our top pick in 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 a 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) relatively stronger MYR. The stock is trading at an undemanding 8.9x FY18E PER compared to the 5-year forward average of 11x.

Source: Kenanga Research - 22 Jun 2018