We maintain our NEUTRAL rating on the AUTOMOTIVE sector. According to the Malaysian Automotive Association (MAA), TIV for December 2019 registered sales of 54,824 units (+4% MoM, +14% YoY). Both MoM and YoY sales growths were stronger, driven by the continuation of aggressive year-end promotional campaign especially by players with 31 December FYE. 2019 reported TIV of 604,287 units (+1%) came in slightly above our estimate (600,000 units) and we envisaged 2020 target at 612,000 (+1.3%), driven by exciting new launches, especially by the non-nationals, better incentives program under NAP 2020 (tentatively to be unveiled on 1QCY20), anticipation of gradual increase in CKD car prices beyond 2020 as well as minimal positive impact from recent BNM adjustment in the overnight policy rate (OPR) by 25bps to 2.75%. Sales volume for January 2020 is expected to be lower than sales-boosted December 2019 due to the shorter working month reduced by Chinese New Year holidays, and fewer promotional activities. Our sector top-pick is BAUTO (OP; TP: RM2.65) which offers a steady dividend yield of 7.4%.

December 2019 registered sales of 54,824 units (+4% MoM, +14% YoY). Both MoM and YoY sales growths were stronger driven by the continuation of aggressive year-end promotional campaign especially by players with 31 December FYE. In particular, the exceptionally strong YoY performance was due to the low-base effect after the historic tax holiday which ended on 31 August 2018, and overall stronger year-end promotional activities.

Taking a detailed look at the passenger vehicles segment (+3% MoM, +16% YoY), both MoM and YoY performances tracked the overall unit sales trend on the above-mentioned reasons. Toyota (+22% MoM, +213% YoY) drove the highest YoY and 2nd highest MoM sales contributed by the all-new Toyota Vios, all-new Toyota Yaris, and Toyota Hilux, which comprised 73% of UMW Toyota sales, while exceptional YoY sales were due to the low base effect last year post a tax-holiday period. This was followed by Proton (+15% MoM, +99% YoY) backed by its popular Proton X70 (28,255 units delivered since launch) with 2,568 units sold (23% of December sales), and further supported by face-lifted Proton Saga, Iriz, and Persona, while Nissan rose from the ashes (+41% MoM, -34% YoY) benefiting from the final-spree promotion, but overall still remained weak due to dearth of all-new model launches to spur demand. Mazda (+12% MoM, -38% YoY) fared the worst YoY affected by the delayed pricing approvals, but recovery in MoM numbers showed increasing delivery for face-lifted CX-5 and all-new CX-8, while Perodua (-10% MoM, 0% YoY) fared the worst MoM as consumer held back purchases waiting for the best-selling face-lifted Bezza (RM35K–RM49K) which was launched in January 2020, but overall sales have shifted focus towards the all-new Perodua ARUZ (30,115 units delivered) recording 2,726 units sold (15% of December sales). Honda (+8% MoM, -10% YoY) overall sales was from its best-selling models of Honda City and Honda HR-V but it is still awaiting launch of its new model to remain competitive (all-new Honda City 2020 in 1HCY2020).

Expecting sales to subside for January 2020. Sales volume for January 2020 is expected to be lower than the sales-boosted December 2019 due to a short-working month arising from Chinese New Year holidays, and fewer promotional activities. Nevertheless, overall car sales will be supported by the higher delivery of new models, including the face-lifted Perodua Bezza, 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), face-lifted CX-5, all-new Mazda CX- 8 and all-new Mazda CX-30.

2019 reported TIV of 604,287 units (+1%) which came in slightly above our estimate (600,000 units) and we envisaged 2020 target of 612,000 (+1.3%). We believe the weak macroeconomic condition, and possible delays in new car launches given the backlog of pricing approvals (3-5 months) will be offset by exciting new launches, especially by the non-nationals, better incentives program under NAP 2020 (tentatively to be unveiled on 1QCY20), anticipation of gradual increase in CKD car prices beyond 2020 as well as minimal positive impact from recent BNM adjustment in the overnight policy rate (OPR) by 25bps to 2.75%. 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 vehicle pricing approval process. 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). UMW Toyota is targeting a minimum 12% market share of industry sales (c.73k units) for 2020 and Perodua at 40% (c.240k units), while Proton is aiming higher at 132k units, or a 32% share.

No increase in car prices for CKD until 31st December 2020. The ministry of finance (MoF) has confirmed via a statement by MAA that there will be no increase in CKD vehicle prices for a period of one year until 31 December 2020. According to the statement, on-the-road (OTR) prices of CKD vehicles will remain status quo due to the transparent reporting of the open market value (OMV) as outlined in the Excise (Determination of Value of Locally Manufactured Goods for the Purpose of Levying Excise Duty) Regulations 2019 dated 31 December 2019, which is in line with World Trade Organisation guidelines. With this announcement, increase in OTR pricing due to the new OMV calculations will be fully absorbed or exempted by the MoF effectively immediately, with car companies required to submit their OMV calculations for models affected by this new methodology to Customs. We note that the recent launches of face-lifted Perodua Bezza, face-lifted Mazda CX-5 and all-new Mazda CX-8 are priced higher by 2-3% compared to their predecessors, but could be quantified with additional accessories that came with the new launches. We believe that any increase in CKD car prices beyond 2020 will be gradual and also depend on models and currency movements.

Source: Kenanga Research - 23 Jan 2020