We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for September 2018 registered sales of 31,241 units (-52% MoM, -24% YoY), which marks the beginning of new SST regime whereby vehicles are charged 10% in sales tax at the vehicles manufacturing level (effective 1st September 2018). Both MoM and YoY car sales growth plunged as bulk of the demands were fulfilled during the GST zero-rated tax holiday period as well as adjustment to post-tax holiday environment. Nevertheless, YTD 9M18 TIV of 454,971 units (+7%) is still within our expectation at 77% of our TIV forecast of 590,000 (+2%), as we expect sales to normalize in the coming months, supported by the usual year-end promotion and upcoming special event, KLIMS 2018. Our sector top pick is MBMR (OP; TP: RM3.60) for its undemanding 6.1x FY18E PER compared to the 5-year forward average of 11x.

September 2018 registered sales of 31,241 units (-52% MoM, -24% YoY). Both MoM and YoY car sales growth plunged as bulk of the demands were fulfilled during the GST zero-rated tax holiday period as well as adjustment to post-tax holiday environment. Taking a detailed look at the passenger vehicles segment (-52% MoM, -26% YoY), both MoM and YoY car sales growth plunged on limited demand as consumers’ demand had been fulfilled during the GST zero-rated tax holiday. Nevertheless, Mazda’s YoY growth surged 71% mainly from the back-logged booking of its flagship model, the all-new Mazda CX-5 as well as recording the lowest MoM drop at 38%, due to their decision in maintaining zero-rated prices for cars booked during the zero-rated period despite the implementation of new SST, which saw price hike of 3% to 9% (compared to zero-rated environment).

New SST gazetted with sales tax of 10% for vehicles, effective 1st September 2018. Sales volume for October 2018 is expected to be flat, as consumers are still adjusting to the new SST environment. Nevertheless, we expect the TIV will recover in November and December buoyed by the usual year-end promotion and upcoming special event, The Kuala Lumpur International Motor Show (KLIMS) 2018 which will be held after five-year of hiatus. With the new SST gazetted on 1st September 2018, vehicles are charged 10% in sales tax at the vehicles manufacturing level (only on fully-built vehicles, CKD parts are exempted). Nevertheless, from the recent announcement by certain car makers, the prices for the locallyassembled 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 the 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% (9M17: 36%) and higher sales growth (+11% 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 lower market share of 17% (9M17: 18%) with a marginal sales growth (+1% YoY) mainly due to lower sales in August and September with the run-out of inventories during the first 2 months of zero-rated tax holiday despite better response for its best-selling models of Honda City, BR-V and Civic (new Honda HR-V facelift was launched in August 2018). Progressing further down the list, Toyota saw higher sales (+7% YoY) with an unchanged market share of 12% (9M17: 12%) with unprecedented sales during the tax-holiday period doubling its usual monthly TIV. On the other hand, Proton (-13% YoY) and Nissan (0% YoY) continued to slide further down the pecking order with a lower market share of 11% (9M17: 13%) and 5% (9M17: 5%), respectively, due to the lack of new volume-driven model launches. Meanwhile, Mazda sales surged 58%, with an unchanged market share at 2% (9M17: 2%) attributed to the higher delivery of its flagship model, the all-new Mazda CX-5.

MBMR (OP; TP: RM3.60) is our sector top pick, 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 allnew Perodua SUV (D38L). The stock is trading at an undemanding 6.1x FY18E PER compared to the 5-year forward average of 11x. MBMR’s TP is based on 11x FY19E EPS, at its 5-year forward historical mean PER.

Source: Kenanga Research - 17 Oct 2018