We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment index scored 107.5 pts (-25.4pts QoQ, +30.4pts YoY) in 3Q18 which is above the optimistic threshold (>100pts) as consumers raced to spend during the remainder of zero-rated tax holiday. Subsequently, on the latest BNM data, the loan approval rate for passenger cars is still above the 5-year loan approval rate average of c.55%, credit to the zero-rated tax holiday. As expected, 3Q18 posted stronger performance from the remainder of zero-rated tax holiday, as well as lower-than-expected SST price increment on CKD vehicles. We expect car sales volume for 4QCY18 to experience a slowdown after consumers completed a large order during the zero-rated tax holiday which saw the emergence of 2nd all-time highest monthly TIV sales in July 2018, but cushioned by the usual year-end season promotion. According to the MAA, TIV for 11M18 TIV was at 550,526 units (+5%); however, we maintain our 2018 year-end estimate at 590,000 units (+2%) as we expect slower sales in December 2018, due to short-working month from Christmas festive season and consumers holding back purchases in anticipation of new launches in 2019. We introduced our 2019 TIV target of flat growth to 590,000 units, as we believe that the absence of one-off 2018 tax holiday will be netted-off by interesting new launches in 2019 including the all-new Perodua ARUZ (est RM72-77k), all-new Toyota Vios, all-new Toyota Yaris Hatchback (tentative) and competitive all-new models by Honda, Nissan, Mazda and Proton. Our sector top-pick is MBMR (OP; TP: RM2.60) for its undemanding 6.2x FY18E PER compared with average net profit growth of 15% per annum over the next two years.

Strong 3QCY18 performance, as expected from the remainder of zero-rated tax holiday in July and August 2018. We have 2 stocks out of the 6 stocks (TCHONG and UMW) performing above expectation while others (BAUTO DRBHCOM, MBMR, and SIME) were within expectations. Most of the Automakers saw stronger sales during the remainder of zero-rated tax holiday and mostly sold out all their respective best-selling models. The negative impact of new SST on sales volume (effective September 2018) was lesser than expected as some of the carmakers locked the zero-rated prices for back-logged order during the zero-rated holiday, while the car prices during the new SST period, especially CKD was lower than GST period (lower by 1% to 3%), which helped cushioned the impact. In this quarter we observed: (i) a boost in associate earnings, Perodua (11M18 at 208,841 units, +13%, market share at 38%) for MBMR and UMW as well as stronger main marques distribution sales, (ii) narrower losses for DRBHCOM with solid market share from associate, Honda (11M18 at 94,261 units,-4%, market share at 11%), (iii) better margin sales for TCHONG (Nissan’s 11M18 at 27,783 units, +12%, market share at 5%), (iv) demand for BAUTO’s premium version of the all-new CX-5 continued to gain traction (Mazda’s 11M18 at 15,789 units, +79%, market share at 2%), and (v) SIME’s strong global industrials division offset the weak sales in its global motors division.

Ending of Tax Holiday. We expect car sales volume for 4QCY18 to experience a slowdown after consumers completed their large order during the zero-rated tax holiday which saw the emergence of 2nd all-time highest monthly TIV sales in July 2018 as well as price adjustment with the 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 CompletelyKnocked-Down (CKD) units have dropped by 1% to 3% (compared to 6%-rated GST), whereas prices for the Completely-BuiltUp (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 85k 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 has been rectified in October 2018. On the other hand, DRBHCOM is expected to benefit from its all-new Proton X70 with CBU launched on 12th December 2018 and CKD in the 2H19. Note that, current booking for the all-new Proton X70 recorded more than 10k units even before the launching date. 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) and supported by its Indochina operation. SIME is still banking on its global share of BMW vehicles, currently at 2.5% of total BMW global sales and it maintained its position as the world second largest BMW dealer albeit showing weaker sales being affected by global competition.

Source: Kenanga Research - 4 Jan 2019