We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment index surged to a 21-year high of 132.9 pts (+41.9 pts QoQ, +52.2pts YoY) in 2Q18 which is above the optimistic threshold (>100pts) as consumer raced to spend during the zero-rated tax holiday. With the new SST effective on 1st September 2018, we expect consumer to withhold their spending at least over the short-term until the market can absorb the impact of the new SST. Subsequently, on the latest BNM data, the loan approval rate for passenger cars in June 2018 and July 2018 have surged pass the comfortable threshold of c.60% and above the 5-year loan approval rate average of c.55%, credit to the zero-rated tax holiday. As expected, 2Q18 posted stronger performance with the start of zero-rated tax holiday and was further supported by pre-Hari Raya Aidilfitri festive sales. We expect the trend to continue in 3QCY18 with the remainder of the tax-holiday, while 4QCY18 to experience a slowdown in vehicles sales with the start of new SST, but cushioned by the usual year-end season promotion. According to the MAA, TIV for 8M18 TIV was at 423,730 units (+10%); however, we maintain our 2018 year-end estimate at 590,000 units (+2%) as we expect the sales to normalize post-SST implementation and we reiterate our 2018 theme of value-formoney sales (focusing on affordable car variants) and segmental targeted sales (focusing on the SUV segment). Our top picks for the sector are TCHONG (OP; TP: RM2.30) and MBMR (OP; TP: RM3.60).

Strong 2QCY18 performance, as expected from the commencement of zerorated tax holiday in 1st June 2018, and further supported by pre-Hari Raya festive season sales. We have 4 stocks out of the 6 stocks (BAUTO, MBMR, SIME, and TCHONG) performing above expectation while 2 stocks (DRBHCOM, and UMW) were within expectations. In this quarter we observed: (i) a boost in associate earnings, Perodua for MBMR and UMW buoyed by stronger Perodua 8M18 unit sales at 158,732 units (+16%), (ii) narrower losses for DRBHCOM with solid sales from associate, Honda (8M18 unit sales at 74,951 units(+6%)), (iii) better margin sales for TCHONG, (iv) Demand for BAUTO’s premium version of the all-new CX- 5 continued to gain traction, and (v) SIME’s strong global industrials division offset the weak sales in its global motors division. In this sector strategy, we downgrade our TP for UMW (MP) to RM5.50 based on 17x FY19EPS (at its 5-year historical mean PER) from RM6.50 based on 20x FY19EPS (implying +1.0SD of its 5-year historical mean PER) to reflect the uncertainties from slower sales post-SST implementation, possibility of booking cancellations for their all-new Toyota C-HR as Proton is preparing to launch, potentially the most affordable high-end SUV (Proton X70), and UMW Aerospace to register losses in the next 2 years (UMW has changed their targeted break-even point for UMW Aerospace from FY19 to FY20).

Ending of Tax Holiday. Overall, car sales volume for 3QCY18 is expected to be higher than 2QCY18 with the remainder of the tax-holiday in July 2018 and August 2018. However, we expect 4QCY18 to experience a slowdown in vehicles sales with implementation of the new SST (starting 1st September 2018), but cushioned by the usual year-end season promotion. 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 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).

Specifically, we expect BAUTO’s 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 120k, with 68k 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 as well as supply disruption in August 2018/September 2018 which is expected to be rectified by end-September 2018. On the other hand, DRBHCOM is waiting for the all-new Proton SUV X70, expected to be launched in October 2018 for CBU and 2H19 for CKD. Note that, current booking for the all-new Proton SUV X70 have hit 5k units even without pricing details. 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 global competition.

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 best-selling models such as 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.

Consumer Sentiment Index surged to 21-year high. The Malaysian Institute of Economic Research’s Consumer Sentiment Index (CSI) scored 132.9 pts (+41.9 pts QoQ, +52.2pts YoY) in 2Q18. We view this as a one-time event as consumer raced to spend during the zero-rated tax holiday which started on June 2018 especially for passenger vehicles on which pre-discounting promotion already started in mid-May 2018. With the implementation of new SST on 1st September 2018, we expect consumer to withhold their spending at least for the near-term until the market can absorb the impact of the new SST. Recall that since the first announcement of the implementation of GST in October 2013 in conjunction with the tabling of the National Budget 2014, CSI readings had only held above 100.0 pts once in 2Q14 but had failed to recover to such level since. The prolonged weakness in the index was likely fuelled by the depreciation in Ringgit, which affected discretionary spending, especially for imports.

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, Innova) with only a 1% difference in market share; whereas, for segmental targeted sales, 2018/2019 will be the year of SUV segment led by the most anticipated introduction of Proton SUV X70 (4Q18), all-new Perodua SUV D38L (1Q19), all-new Toyota C-HR (1Q18), Toyota Rush (4Q18), all-new Mazda CX-8 (2H19) and supported by the existing models of Mazda (all-new CX-5 and CX-3) ,Honda (BR-V, HR-V and CR-V), Toyota (Vios, Hilux, Innova) and Nissan (X-Gear and X-Trail). Note that, the all-new third-generation Perodua Myvi (priced at RM44,300 to RM55,300 with current booking at 120k and 68k delivered) 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 selling at double the price. The all-new Perodua Myvi is expected to be the number 1 selling hatchback car model 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 one of our top picks 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 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. TCHONG’s TP is based on 0.5x FY19E BVPS at its 3-year historical forward mean, implying PER of 24x.

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 6.4x 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 - 3 Oct 2018