We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for June 2018 registered sales of 64,502 units (+50% MoM, +28% YoY). Car sales growth MoM and YoY were boosted by: (i) the zero-rated GST which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018, and (ii) pre-Hari Raya Aidilfitri festive sales campaign. Correspondingly, YTD 6M18 TIV of 289,714 units (+2%) came within expectation at 49% of our TIV forecast of 590,000 (+2%). Going forward, sales volume for July 2018 and August 2018 are expected to be around the June 2018 level as consumers race to purchase the zero-rated GST vehicles before the new SST is gazetted (tentatively, on 1st September 2018), which we believe will push vehicles prices higher by an average of c.8%, if the mechanism is the same as the previous SST regime. TCHONG (OP; TP: RM2.30) is the prime beneficiary of the zero-rated GST tax holiday period given its capability to execute 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 8.9x FY18E PER compared to the 5-year forward average of 11x.

June 2018 registered sales of 64,502 units (+50% MoM, +28% YoY). The car sales for MoM and YoY were boosted by the zero-rated GST sales which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018 and further supported by pre-Hari Raya Aidilfitri festive sales campaign. Taking a detailed look at the passenger vehicles segment (+44% MoM, +27% YoY), both stronger MoM and YoY sales were attributed to the above. Specifically, Perodua’s MoM sales went against the trend (-11% MoM) which we believe was due to the lack of ready-for-delivery inventories, as its production line was focused on completing the bookings of the all-new Perodua Myvi (bookings have hit 70k, with 38k units delivered). Meanwhile, the weak YoY sales for Proton (-15% YoY) was attributed to the lack of new car models.

Zero-rated GST robust sales to continue until the new SST introduction. Sales volume for July 2018 and August 2018 are expected to be around the June 2018 level as consumers race to purchase the zero-rated GST vehicles (at an average of c.6% reduction in vehicles prices), before the new SST is gazetted (tentatively, on 1st September 2018) which may increase car prices across the marques depending on the new tax mechanism (tentatively, provision of services at 6% and sales of goods at 10%). If the new mechanism is the same as the previous SST regime, we believe that there will be at an average of c.8% increase in vehicles prices across the marques from the current zero-rated tax.

Perodua maintaining its leading 41% market share. Perodua continued to lead the pack with a market share of 41% (6M17:35%) and higher sales growth (+17% 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 unchanged market share of 18% (6M17:18%) with a slightly lower sales growth (-2% YoY) as consumers held back purchases in anticipation of new launches in 2H18, especially for the face-lifted Honda HR-V (recently opened for booking, will be launched in July/August 2018). Progressing further down the list, Toyota saw lower sales (-6% YoY) with a lower market share of 11% (6M17:12%) as consumers held back purchases in anticipation of the all-new Toyota Rush and face-lifted variants of its bestselling models Vios and Innova. On the other hand, Proton (-31% YoY) and Nissan (-12% YoY) continued to slide further down the pecking order with a lower market share of 9% (6M17:14%) and 4% (6M17:5%), respectively, due to the lack of new volumedriven model launches. Meanwhile, Mazda’s sales surged 40%, with an unchanged market share at 2% (6M17: 2%) attributed to the higher delivery of its flagship model, the all-new Mazda CX-5.

TCHONG (OP;TP:RM2.30) is the prime beneficiary of the zero-rated GST tax holiday period (Nissan June 2018 TIV at 3,008 units (+45% MoM, +9% YoY) registered the first monthly YoY positive growth since January 2018) given its capabilities to execute 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, Nissan Almera, Xtrail and Navara. We like the stock for its: (i) turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, (ii) expected expansion of its Indochina operations for larger market share volume, and (iii) a stronger MYR. TCHONG’s TP is based on the 0.52x 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 8.9x FY18E PER compared to the 5- year forward average of 11x. MBMR’s TP is based on the 11x FY19E EPS which is at its 5-year forward historical mean PER.

Source: Kenanga Research - 19 Jul 2018