We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for October 2018 registered sales of 42,273 units (+51% MoM, 0%YoY). MoM car sales growth was boosted by new stocks replenishment after the depletion during the zero-rated tax holiday as well as recovery in production line for Perodua’s (+106% MoM, +18% YoY) all-new Myvi after supply disruption in August and September. Nevertheless, YoY car sales growth was flat, lacking new model launches compared to last year. YTD 10M18 TIV of 502,244 units (+6%) is still within our TIV forecast of 590,000 (+2%), as we expect stronger sales in the coming months, supported by the new model launches, usual year-end promotion and upcoming special event- KLIMS 2018. Our sector top-pick is MBMR (OP; TP: RM3.60) for its undemanding 5.5x FY18E PER compared with average net profit growth of 15% per annum over the next 2 years.

October 2018 registered sales of 42,273 units (+51% MoM, 0%YoY). MoM car sales growth was boosted by new stocks replenishment after the depletion during the zero-rated tax holiday as well as recovery in production line for Perodua’s (+106% MoM, +18% YoY) all-new Myvi after supply disruption in August and September. Nevertheless, YoY car sales growth was flat, lacking new models launches compared to last year.

Taking a detailed look at the passenger vehicles segment (+57% MoM, +2% YoY), MoM passenger car sales growth was stronger across the marques with Perodua (+106% MoM) clinching the highest growth with the recovery in production line for its best-selling all-new MyVi after supply disruption in one of its vendors in August and September. YoY passenger car sales growth was slower, lacking new model launches compared to last year, except for Perodua (+18% YoY) and Mazda (+67% YoY), buoyed by their respective, back-logged booking of the all-new Perodua MyVi and Mazda CX-5.

New model launches and aggressive year-end promotion to boost sales in the upcoming month. Sales volumes for November 2018 and December 2018 are expected to be stronger, buoyed by new model launches, usual aggressive yearend promotion and upcoming special event, The Kuala Lumpur International Motor Show (KLIMS) 2018 will be held after a five-year 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, 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%, which 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, clinching stronger sales with the all-new Myvi. Perodua continued to lead the pack with a market share of 37% (10M17: 35%) and higher sales growth (+12% YoY) driven by higher deliveries of the allnew Perodua Myvi (bookings have hit 120k, with 75k units delivered). At the number two position, Honda registered lower market share of 17% (10M17: 18%) with a lower sales growth (-1% YoY) mainly due to lower sales in August and September with the run-out of inventories during the first two months of zero-rated tax holiday despite better response for its best-selling models such as Honda City, BR-V and Civic (new Honda HR-V facelift was launched in August 2018). Drifting further down the list, Toyota saw higher sales (+3% YoY); however, with a lower market share of 11% (10M17: 12%) due to lower sales in September 2018 during the initial implementation of the new SST. Note that, Toyota recently launched the all-new Toyota Rush and will be launching the all-new Toyota Camry in November 2018. On the other hand, Proton (-11% YoY) and Nissan (+2% YoY) continued to slide further down the pecking order with lower market share of 11% (10M17: 13%) and 5% (10M17: 5%), respectively, due to the lack of new volume-driven model launches. Note that, Proton will be launching its first SUV- the all-new Proton X70 - in mid-December 2018. Meanwhile, Mazda sales surged 59%, registering the first higher market share at 3% (10M17: 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, 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 5.5x FY18E PER compared with average net profit growth of 15% per annum over the next 2 years.

Source: Kenanga Research - 21 Nov 2018