We maintain our NEUTRAL rating on the AUTOMOTIVE sector. This stance is backed by improvement in the MIER consumer sentiment gauge, which peaked at 91.0 pts for 1Q18 (+8.4 pts QoQ, +14.4 pts YoY), albeit still below 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%. 1QCY18 start the year with mixed performance following the ending of usual year-end seasonal discount and promotion as well as slower sales from car-makers that did not launch any new models in the quarter. Nonetheless, we expect 2QCY18 and 3QCY18 to be boosted by the zero-rated GST Tax Holiday, which has reduced car prices by c.6.0% across the marques. According to the MAA, TIV for 5M18 TIV was at 225,212 units (-4%), with Perodua (+19%) and Mazda (+31%) recording the only positive growth. 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). TCHONG (OP; TP: RM2.30) is the prime beneficiary of the zero-rated GST tax holiday period given its capabilities to do on-time car delivery (within 2 weeks) supported by its huge inventories valued at RM1.1b (vs. sector average of c.RM500m) which consisted of over 60% of its best-selling models namely Nissan Almera, Xtrail and Navara. Our other top pick for the sector is MBMR (OP; TP: RM3.30) which is trading at an undemanding 9.0x FY18E PER compared to the 5-year forward average of 11x.

2QCY18 was another mixed performing quarter, as we had 2 stocks out of the 6 under coverage (MBMR and TCHONG) performing above expectation while 3 stocks (DRBHCOM, SIME and UMW) were within expectation and the remaining 1 stock (BAUTO) came below expectation. In the quarter we observed; (i) slower car sales for DRBHCOM and TCHONG due to lack of new model launches for the Proton and Nissan brands, respectively; however, TCHONG posted higher-thanexpected margin expansion from the higher sales of high-margin Nissan Navara and X-trail, (ii) MBMR and UMW scored higher profit contributions from their associate, Perodua on the best-selling all-new Myvi, albeit lower sales were seen for UMW Toyota models, (iii) SIME’s motors division continued to be impacted by the strong global competition, but was cushioned by its strong industrial division, and (iv) BAUTO local car sales were held back by the higher-than-expected demand for its premium version of the all-new CX-5. In this sector strategy, we downgrade our TP for SIME (MP) from RM2.70 to RM2.55 as we revised our SOP valuation in tandem with the changes in our benchmark valuation (for Industrials, Logistics and Healthcare division), which we believe due to the uncertainties in the global market.

Tax holiday drive-through starting 2QCY18. Overall, car sales volume for 2QCY18 is expected to be higher than 1QCY18 as some of the car-makers are giving early discounts and rebates for the period of 16th-31st May ahead of the implementation of zero-rated GST starting 1st June 2018 (at an average c.6% reduction in car prices) as well as supported by the Hari Raya festive season promotional campaigns. Furthermore, sales volume for the coming 3QCY18 is expected to be boosted by the zero-rated GST tax holiday transition period until the new SST is gazetted (expected initiation on 1st Sept 2018), which may see a hike in car prices depending on the new mechanism. Specifically, we expect BAUTO sales to gain traction with the higher delivery of its flagship model, the all-new Mazda CX-5 in the local market as well as from the commencement of the all-new Mazda CX-5 exports 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 all-new Perodua Myvi bookings have hit 70k, with 38k 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. The underdog, TCHONG is expected to gain better volume with the all-new Nissan Serena S-Hybrid and supported by the sales of high-margin models (X-trail and Navara). SIME is still banking on its global share of BMW vehicles, currently at 2.5% of total BMW global sales and maintained its position as the world second largest BMW dealer albeit showing weaker sales being affected by the global competition.

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 delivery of the all-new Perodua Myvi. 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 (i.e. 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 pole with a lower market share of 9% (5M17:14%) and unchanged market shareof 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.

We maintain our TIV estimates at 590,000 units (+2%) as we reiterate our 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 2H18/1Q19, 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).

TCHONG (OP;TP:RM2.30) is the prime beneficiary of the zero-rated GST tax holiday period given its capabilities to do ontime car delivery (within 2 weeks) supported by its huge inventories valued at RM1.1b (vs. sector average of c.RM500m) which consisted over 60% of its best-selling models, Nissan Almera, Xtrail and Navara. We like the stock for its: (i) turnaround in earnings after two consecutive years of losses with its current focus on high-margin vehicles, (ii) expected expansion of its Indochina operations for larger market share volume, and (iii) a stronger MYR. TCHONG TP is based on the0.52x FY19E BVPS at its 3-year historical forward mean, implying PER of 28x.

MBMR (OP; TP: RM3.30) is our other 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.RM1.4b), (ii) expected strong turn-around 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 9.0x FY18E PER compared to the 5- year forward average of 11x. MBMR TP is based on the 11x FY19E EPS which at its 5-year forward historical mean PER.

Source: Kenanga Research - 5 Jul 2018