We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for August 2018 registered sales of 65,551 units (-4% MoM, +27% YoY), ending the historic 3-month zero-rated tax holiday. Car sales growth, YoY, was boosted by the zero-rated GST which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018; however, MoM saw weaker sales owing to Perodua’s supply disruption and run-out of popular passenger vehicle models during the first two months of the tax holiday. Correspondingly, YTD 8M18 TIV of 423,730 units (+10%) came in within expectation at 72% of our TIV forecast of 590,000 (+2%). Sales volume for September 2018 is expected to be lower than the August 2018 level with the ending of the zero-rated tax holiday. TCHONG (OP; TP: RM2.30) is our top pick in the sector for its turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, and expected expansion of its Indochina operations for larger market share volume. Our other top pick for the sector is MBMR (OP; TP: RM3.60) which is trading at an undemanding 6.3x FY18E PER compared to the 5-year forward average of 11x.

August 2018 registered sales of 65,551 units (-4% MoM, +27% YoY). Car sales growth, YoY, was boosted by the zero-rated GST which saw an average 6% reduction in vehicles prices across the marques starting 1st June 2018; however, MoM saw weaker sales owing to Perodua’s supply disruption and run-out of popular passenger cars model during the first two months of the tax holiday. Taking a detailed look at the passenger vehicles segment (-9% MoM, +21% YoY), YoY growth was boosted by the zero-rated tax holiday which saw higher sales growth across the marques except for Perodua, (-4% YoY) hampered by its limited supply of inventory due to back-logged booking of the all-new Perodua Myvi (bookings have hit 120k, with 68k units delivered). On the other hand, MoM sales was weighted down by the supply disruption for Perodua (-25% MoM) best-selling all-new Perodua Myvi, as well as run-out of popular passenger vehicles model from other carmakers, Honda (-16% MoM) and Toyota (-8% MoM) especially for Honda City and Toyota Vios, respectively.

New SST gazetted at sales tax of 10% for vehicles, effective 1st September 2018. Sales volume for September 2018 is expected to be lower than the August 2018 level with the ending of the zero-rated tax holiday. With the new SST gazetted on 1st September 2018, vehicles are charged 10% sales tax. Nevertheless, from the recent announcement by certain car makers, the prices for the locally-assembled and Completely-Knocked-Down (CKD) units have dropped by 1% to 3% (compared to 6%-rated GST), whereas the prices for the Completely-Built-Up (CBU) units have increased by 1% to 3%. We believe the unexpected price decrease in locally-assembled and CKD units was attributed to the better compliance of Industrial Linkage Programme (ILP) regulation, which provides incentives and duty exemption to the original equipment manufacturers (OEMs) that use local components (under National Automotive Policy 2014).

Perodua maintained leading position, despite losing some of its market share during the zero-rated GST. Perodua continued to lead the pack with a market share of 37% (8M17: 36%) and higher sales growth (+16% YoY) driven by higher deliveries of the all-new Perodua Myvi (bookings have hit 120k, with 68k units delivered). At the number two position, Honda registered unchanged market share of 18% (8M17: 18%) with a higher sales growth (+6% YoY) with the better reception of its bestselling models of Honda City, BR-V and Civic (new Honda HR-V facelift which recently opened for booking was launched in August 2018). Progressing further down the list, Toyota saw higher sales (+10% YoY) with an unchanged market share of 12% (8M17: 12%) with unprecedented sales during the tax-holiday period doubling its usual monthly TIV. On the other hand, Proton (-14% YoY) and Nissan (+1% YoY) continued to slide further down the pecking order with a lower market share of 11% (8M17: 13%) and 4% (8M17: 5%), respectively, due to the lack of new volume-driven model launches. Meanwhile, Mazda sales surged 57%, with an unchanged market share at 2% (8M17: 2%) attributed to the higher delivery of its flagship model, the all-new Mazda CX-5.

TCHONG (OP; TP: RM2.30) is our top pick in the sector for its: (i) turnaround in earnings after two consecutive years of losses with focus on high-margin vehicles, and (ii) expected expansion of its Indochina operations for larger market share volume. TCHONG’s TP is based on 0.5x FY19E BVPS at its 3-year historical forward mean, implying PER of 24x. TCHONG was the prime beneficiary of the zero-rated GST tax holiday period (Nissan’s August 2018 TIV at 3,501 units (+27% MoM, +83% YoY) given its capabilities to execute on-time car delivery (within two weeks), however, we expect the near-term sales will be negatively affected by the new SST implementation, but to be cushioned by the sales of its high-margin models.

MBMR (OP; TP: RM3.60) 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), and (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). The stock is trading at an undemanding 6.3x 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 - 21 Sept 2018