We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment index scored 96.8 pts (-10.7pts QoQ, +14.2pts YoY) in 4Q18 which is below the optimistic threshold (>100pts) due to muted growth post the zero-rated tax holiday and is expected to record only marginal improvement in subsequent quarters due to tepid purchasing power. Nevertheless, we believe that consumers are changing their preference toward value-for-money (volume buy) national marques to satisfy their needs, while non-national marques are focusing on higher-margin low-volume models (catering to higher-purchasing power consumers). Notable developments in Automotive industry in 2019 include: (i) National Marques surpassed Non-National marques’ market share, (ii) Proton surpassing Honda as no.2 trailing behind Perodua in total industry market share TIV in 2 years’ time powered by the all-new Proton X70, supported by upcoming all-new and face-lifted models, (iii) increasing number of new model launches, and (iv) introduction of third national car under National Automotive Policy 2019. We increase our 2019 TIV target to 600,000 units from 590,000 units matching MAA’s target factoring the extra boost from national marques (Proton and Perodua). Our sector top-picks are MBMR (OP; TP: RM3.45) and BAUTO (OP; TP: RM2.85).

National marques surpassed Non-National marques’ market share. As of 2M19, the national marques (56%) had surpassed the non-national marques (44%) in terms of market share, first time since 2013, attributed to the outstanding sales from Perodua, especially after the introduction of its all-new Myvi (150k bookings, 110k delivered) and boosted by surge in Proton sales, after the introduction of its all-new Proton X70 (20k bookings, 9.8k delivered), and supported by fresh new face-lifted, improved technological variants of existing line-ups. Notable changes include Honda recently announcing its 2019 target of 95,000 units, which is lower than 2018 (102,282 units) due to challenging market condition. The marque’s 2018 market share was 17.1% premised on locally assembled models of Honda City (32%), Civic (16%) and CR-V (13%). Nevertheless, the reported 2M19 sales showed Honda losing market share to 15%, and coupled with the lower targeted number of 95k units, we believe that its market share will maintain at c.16% for the full year. We believe that consumers are changing their preferences to national carmakers which offer cheaper variants. In comparison, given this year focus on SUV, Honda CR-V (RM137-163k) has a higher price tag compared to all-new Proton X70 (RM98-124k), whereas, on lower segment end, Honda BR-V (RM80-90k) also has a higher price tag compared to all-new Perodua ARUZ (RM73-78k).

We increased our 2019 TIV target to 600,000 units (+0.2%). We increase our 2019 TIV target to 600,000 units from 590,000 units matching MAA’s target of 600,000 units factoring the extra boost from national carmakers numbers (Proton and Perodua). Proton X70 sales were exceptional with 20k bookings and 9.8k delivered since launching on 12th December 2018 only for CBU models, and more will be delivered when CKD models roll in 2H19. Proton is optimistic of its upcoming smaller SUV segment based on Geely Binyue, and supported by face-lifted variants of existing models. On the other hand, Perodua has targeted a higher 2019 sales at 231,000 units (+1.7%) which is largely premised on its all-new Myvi (150k bookings, 110k delivered), with is further boosted by the all-new Perodua ARUZ (booking at 14k units, c.4k delivered). We also revised our Sum-of-Parts (SoP) TP for DRBHCOM (MP) to RM1.90, from RM1.80, to factor in the positive boost in Proton volume.

Neutral rating maintained. We believe that the absence of one-off 2018 tax holiday will be offset by exciting new launches in 2019. Note that, we have factored in possible delay in new launches’ timing given the backlog of pricing approvals from the authorities (to 3-4 months, improved from 4-7months, previously), absence of sales boosting tax-holiday, and tepid purchasing power. The Ministry of International Trade and Industry (MITI) had decided to increase the frequency of the monthly meetings held by the Automotive Business Development Committee (ABDC), which is chaired by MITI, from once to twice a month to speed up the vehicles pricing approval process. Subsequently, from the latest BNM data, the loan approval rate for passenger cars is still above 55% (5-year loan approval rate mean) credit to delivery of back-logged order for vehicles booked before new SST implementation.

Tepid demand post-zero rated holiday in 4QCY18. Only two (MBMR, and BAUTO) out of six stocks under our coverage performed above expectation while 4 stocks (DRBHCOM, SIME, TCHONG, and UMW) were within expectation. Overall, we saw weaker performance in 4QCY18, except for Perodua-linked companies, as expected, due to the higher base in the 3QCY18 which was boosted by the tail-end of zero-rated tax holiday. Nevertheless, Perodua-linked companies, UMW and MBMR recorded stronger performances, mainly from the higher associates’ contribution from the recovery in supply disruption for the all-new Perodua Myvi in August and September 2018, which had been rectified in October 2018.

Looking forward to 1QCY19 and 2QCY19. Overall, car sales volumes for 1Q19 and 2Q19 are expected to be stronger than 4QCY18 buoyed by the pent-up demand for new model launches, unusually slower year-end sales in 4QCY18 and CNY festivities’ promotional sales and Hari Raya promotional sales, respectively. Recent new launches include Proton X70, Perodua ARUZ, face-lifted Honda HR-V (includes Hybrid), face-lifted Proton IRIZ and Persona, Toyota Vios and Toyota Rush (first batch delivery due to approval issues). Upcoming new launches include all-new Toyota Yaris (2Q19), all-new A90 Toyota GR Supra (2H19), T32 Nissan X-Trail facelift (April 2019), Mazda CX-8 (CKD, 2H19), Mazda CX-30 (CBU, 2H19), Proton/Geely Binyue (tentative), all-new Perodua Alza (tentative), and face-lifted Proton Exora (tentative).

Source: Kenanga Research - 4 Apr 2019