We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for July 2018 registered sales of 68,465 units (+6% MoM, +41% YoY), which is the second highest monthly TIV in history (the highest was in December 2015 at 69,371 units). Car sales growth, MoM and YoY, were boosted by the zero-rated GST which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018. Correspondingly, YTD 7M18 TIV of 358,179 units (+8%) came in within expectation at 61% of our TIV forecast of 590,000 (+2%). Sales volume for August 2018 are expected to be around the July 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, Serena, Xtrail and Navara. Our other top pick for the sector is MBMR (OP; TP: RM3.30) which is trading at an undemanding 8.8x FY18E PER compared to the 5-year forward average of 11x.

July 2018 registered sales of 68,465 units (+6% MoM, +41% YoY) which is the second highest monthly TIV in history (the highest was in December 2015 at 69,371 units). Car sales growth, MoM and YoY, were boosted by the zerorated GST which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018. Taking a detailed look at the passenger vehicles segment (+6% MoM, +41% YoY), both stronger MoM and YoY sales were attributed to the above. Specifically, MoM, Toyota and Mazda’s sales went against the trend (-30% MoM and -23% MoM, respectively) which we believe was due to the lack of ready-for-delivery inventories. Specifically, for YoY growth, all are winners buoyed by their respective best-selling models, Perodua (Axia, Myvi and Bezza), Proton (Saga and Persona), Honda (City, BRV, and Civic), Toyota (Vios and Avanza), Nissan (Almera, Navara, and Serena) and Mazda (CX-5 and Mazda 2).

Zero-rated GST robust sales to continue until the new SST introduction. Sales volume for August 2018 are expected to be around the July 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 in a range of 5-10%). 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 lead with 39% market share. Perodua continued to lead the pack with a market share of 39% (7M17:35%) 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 unchanged market share of 18% (7M17:18%) with a higher sales growth (+5% YoY) with the better reception of its best-selling models of Honda City, BR-V and Civic (new Honda HR-V facelift recently opened for booking, will be launched in July/August 2018). Progressing further down the list, Toyota saw higher sales (+4% YoY) with an unchanged market share of 12% (7M17:12%) with unprecedented sales during the tax-holiday period doubling its usual monthly TIV. On the other hand, Proton (-22% YoY) and Nissan (-5% YoY) continued to slide further down the pecking order with a lower market share of 10% (7M17:14%) and 4% (7M17:5%), respectively, due to the lack of new volume-driven model launches. Meanwhile, Mazda sales surged 44%, with an unchanged market share at 2% (7M17: 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’s July 2018 TIV at 2,544 units (+4% MoM, +31% YoY) 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 0.5x FY19E BVPS at its 3-year historical forward mean, implying PER of 24x.

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 8.8x FY18E PER compared to the 5-year forward average of 11x. MBMR’s TP is based on the 11x FY19E EPS, at its 5-year forward historical mean PER.

Source: Kenanga Research - 20 Aug 2018