We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for August 2019 registered sales of 51,148 units (+1% MoM, -22% YoY). MoM sales growth was flat with only Proton recording significantly higher MoM growth backed by its popular Proton X70, and further supported by face-lifted Proton Saga, Iriz, and Persona. Meanwhile, YoY sales plunged due to the high base effect from the historic tax holiday from 1st June 2018 to 31st August 2018. Only Perodua recorded positive YoY growth due to a lower base last year arising from supply constraint for its popular all-new Myvi. 8M19 reported TIV of 398,325 units (-6%), within our expectation, at 66% of our 2019 TIV target of 600,000 units. Sales volume for September 2019 is expected to be weaker compared to August 2019 due to the spate of public holidays but stronger YoY due to tepid demand post tax-holiday last year. Our sector top-pick is BAUTO (OP; TP: RM2.75) which offers a steady dividend yield of 7.2%

August 2019 registered sales of 51,148 units (+1% MoM, -22% YoY). MoM sales growth was flat with only Proton recording higher MoM growth backed by its popular Proton X70, and further supported by face-lifted Proton Saga, Iriz, and Persona. Meanwhile, YoY sales plunged due to the higher base effect from the historic tax holiday which started from 1st June 2018 to 31st August 2018. Only Perodua recorded positive YoY growth due to a lower base last year arising from supply constraint for its popular All-new Myvi.

Taking a detailed look at the passenger vehicles segment (+1% MoM, -16% YoY), overall August passenger car sales were flat MoM as consumers held back for new launches and better year-end promotional campaign. On the other hand, the YoY performance was unable to match last year’s historic tax holiday sales. The highest MoM gainer for the month was Proton (+6% MoM, -4% YoY) backed by its popular Proton X70 (30k bookings, 20.4k delivered) with 1,909 units sold (21% of August sales), and further supported by face-lifted Proton Saga, Iriz, and Persona. On the other hand, Perodua was the only gainer YoY (+1% MoM, +13% YoY) which has shifted their sales focus toward the all-new Perodua ARUZ (25k bookings, 20.3k delivered) and recorded 2,421 units sold (12% of August sales). Nissan suffered the worst sales both MoM and YoY (-11% MoM, -48% YoY) due to dearth of all-new model launches to spur demand as well as lower traction from the face-lifted Nissan X-Trail. Toyota sales (- 2% MoM, -28% YoY) was cushioned by the all-new Toyota Vios, all-new Toyota Yaris, and Toyota Hilux, which comprised 70% of UMW Toyota sales, while Honda (+1% MoM, -30% YoY) was still awaiting pricing approval to launch its new model.

Expecting weaker September 2019 sales. Sales volume for September 2019 is expected to be weaker compared to August 2019 from the spate of public holidays (Awal Muharram, Agong’s Birthday, and Malaysia Day), but stronger YoY due to the tepid demand post tax-holiday last year. Overall, car sales will be supported by the higher delivery of new models, including the all-new Perodua ARUZ (entry-level SUV segment), Honda HR-V facelift (includes Hybrid), all-new Toyota Vios, all-new Toyota Yaris, all-new Proton X70, face-lifted Proton Persona, Iriz, and Saga (X70 unique features), and face-lifted Nissan X-Trail.

We maintain our 2019 TIV target at 600,000 units (+0.2%). We maintain our 2019 TIV target at 600,000 units, in line with MAA’s target. We believe the absence of sales-boosting event such as the one-off 2018 tax holiday will be offset by exciting new launches in 2019 and we have also factored in possible delays in new car launches given the backlog of pricing approvals from the authorities (3-5 months), and tepid purchasing power. MITI has decided to increase the frequency of the monthly meetings held by the Automotive Business Development Committee (ABDC), chaired by MITI, from once to twice a month to speed up the vehicles pricing approval. On the other hand, MITI has established a trade and advisory council (TIAC), which will discuss issues on subjects ranging from foreign direct investment (FDI) and domestic direct investment (DDI) to the National Automotive Policy (NAP) in its upcoming meetings (with a minimum of four meetings/year). For stocks (i.e. DRBHCOM) that have deviated from the rating definition, we make no changes to our call and TP for now, pending further corporate development and re-rating catalysts.

National marques continued to be in the lead. Perodua continued to lead the pack with a higher market share of 41% (8M18: 37%), with marginal sales growth (+2% YoY) driven by the all-new Perodua Myvi, and the all-new Perodua ARUZ. This was followed by Honda and Proton at the same position. Honda registered lower market share of 15% (8M18: 18%) with a lower sales growth (-21% YoY) as consumers held back purchases expecting new models in 2H19, which was delayed due to pricing approval issues. Proton (+37% YoY) gained higher market share of 15% (8M18: 11%) owing to the higher delivery of the all-new Proton X70, and also supported by the existing face-lifted line-ups. Drifting further down the list, Toyota sales volume plunged (-15% YoY) with a lower market share of 11% (8M18: 12%) as Toyota recorded the highest sales volume in history during the tax holiday last year. However, it was cushioned by its best-selling all-new Toyota Vios, all-new Toyota Yaris, and Toyota Hilux. Meanwhile, Nissan (- 25% YoY) saw its market share lowered to 3% (8M18: 4%), due to the lack of new volume-driven model launches; whereas Mazda recorded lower sales (-14% YoY), with unchanged market share at 2% (8M18: 2%) after it fully delivered the discounted all-new CX- 5 in May 2019, and is counting on face-lifted CX-5 and all-new CX-8 to push 2H19 volume sales.

BAUTO (OP; TP: RM2.75) is our sector top pick: We like the stock or its: (i) expected earnings recovery from the stream of allnew models, especially from its popular, face-lifted/turbo Mazda CX-5, (ii) superior margins, above industry peers (average profit margin of c.9% vs. peers of c.2%), and (iii) steady dividend yield of 7.2%. BAUTO will launch its popular face-lifted and turbo variants of CX-5 on 30th Sept, and all-new Mazda CX-8 on 1st Oct. BAUTO is also looking to bring in the all-new CX-30 (CBU from Thailand) and face-lifted CX-3 (CBU) in Dec 2019. Our TP is based on 13x CY20E EPS (at -0.5SD of its 3-year Fwd historical PER).

Source: Kenanga Research - 23 Sept 2019