We maintain NEUTRAL on the sector but we cut our 2020 sales target to 560,000 units (-6.7%) from 612,000 units on cautious consumer spending in 1HCY20 on high-value discretionary spending such as vehicles, imported goods and overseas travels. We believe that the quantum of TIV decline will not be as severe as the 1997-98 Asian financial crisis (-60%), but below the 2007-08 sub-prime crisis (+13%) based on the current state of the Malaysian economy. As all the companies under our coverage are already experiencing sharp fall in their share prices, we believe the downside is limited; thus, we maintain our calls but revising TPs to reflect the lowest valuation possible for most of the stocks and expect a better 2HCY20 on recovering consumer sentiment and stream of all-new models launches. The MIER consumer sentiment index scored 82.3 points (- 1.7ppt QoQ, -14.5ppt YoY) for its 4QCY19 Consumer Sentiment Index (CSI), which is below the optimistic threshold (>100pts) due to cautious spending patterns observed from the consumers, which leans more towards value-for-money purchases instead of high-value discretionary spending such as vehicles, imported goods and overseas travels. Reflecting this, we are seeing car sales trending in favour of value-for-money national marques, while, non-national marques on the other hand, are focusing on higher-margin lower volume models (catering to higher purchasing power consumers). Our sector preferred pick is BAUTO (OP; TP: RM1.40) for its defensible niche SUV market and attractive, steady dividend yield of 10%.

Maintain NEUTRAL on the sector, but with a lower 2020 sales target of 560,000 units (-6.7%) (from 612,000 units). In light of the fast-spreading COVID-19, our economic team views that a nationwide movement control order (MCO) to contain the outbreak will adversely impact the economy in the short term, but would be limited given that there is an exception for important government and business services to run as usual and the restriction will last for a two-week period. This has led to showrooms, vehicle productions and deliveries to be temporarily closed, halted and delayed, respectively, across all marques. Going forward, the full impact would depend on the outcome of containment measures and whether movement restriction would be extended. We believe the weak macro-economic condition, and possible delays in new car launches given the backlog of pricing approvals (3-5 months) since last year have been factored in and will be offset by exciting new launches, especially by the non-nationals, better incentives program under NAP 2020, and positive impact from recent BNM cut in the overnight policy rate (OPR) and pre-emptive measures announced recently to assist those who may be financially challenged by Covid-19 impact. Hence, we maintain NEUTRAL on the sector but we cut our 2020 sales target to 560,000 units (-6.7%) from 612,000 units on cautious consumer spending in 1HCY20 on high-value discretionary spending such as vehicles, imported goods and overseas travels. We believe that the quantum of TIV decline will not be as severe as 1997-98 Asian financial crisis (-60%), but below the 2007-08 sub-prime crisis (+13%) based on the current state of Malaysian economy (please refer to Kenanga Research Economic Reports). As all the companies under our coverage are already experiencing sharp falls in their share prices, we believe that the downside is limited; thus, we maintain our calls but revising TPs to reflect the lowest valuation possible for most of the stocks and expect a better 2HCY20 on recovering consumer sentiment and stream of all-new models launches.

National marques chalking up better sales volume, while non-nationals retreating on dearth of all-new launches. For 4QCY19 reporting season, only 1 out of the 6 coverage stocks (SIME) performed above expectation, 3 stocks (BAUTO, TCHONG and UMW) came below expectation, with remainders (DRBHCOM, MBMR) within expectation. Overall stronger 4QCY19 unit sales performance was seen for carmakers driven by seasonally stronger year-end promotions and Christmas festivities as well as from a low-base effect in 3QCY19. Nevertheless, overall sales value was impacted by the unfavourable sales mix skewed toward lower margin and lower-price tag vehicles which impacted margins.

Looking forward to 1QCY20/2QCY20, We expect most of the carmakers to perform weaker in 1QCY20 which is seasonally weak compared to the last quarter, and worsened by the Covid-19 outbreak especially with the closure of showrooms and automotive plants during the two-week nationwide movement control order (18 March to 31 March). That said, we are expecting consumer sentiment to remain soft for the upcoming quarters, with the possibility of the nationwide movement control order extended beyond 31st March 2020 should the pandemic worsen. Nonetheless, we expect a better 2HCY20 on recovering consumer sentiment and stream of all-new models launches. Upcoming new launches include the Proton X50 (CKD, 2HCY20), Perodua D55L/Raizen (2HCY20), all-new Honda City 1.0 Turbo (2HCY20), all-new Nissan Almera 1.0 turbo (2HCY20). There are also streams of unannounced all-new launchings pending pricing approvals and better incentives program under NAP 2020.

Consumer sentiment to remain soft. The Malaysian Institute of Economic Research’s (MIER) posted 82.3 points (-1.7ppt QoQ, - 14.5ppt YoY) for its 4QCY19 Consumer Sentiment Index (CSI). We believe the QoQ weakness is largely owed to the increasingly cautious spending patterns observed from the consumers, which leans more towards value-for-money purchases instead of high value discretionary spending such as vehicles, imported goods and overseas travels. That said, we are expecting consumer sentiment to remain soft for the upcoming quarters, as heightening Covid-19 cases recorded within Malaysia and the imposed movement restriction from 18 March to 31 March are likely to take a toll on consumers’ confidence.

BAUTO is our preferred pick for its: (i) high margin sustained by the stream of all-new models, (ii) superior margins above industry peers (average profit margin of c.7% vs. peers of c.2%), and (iii) steady dividend yield of c.10%. BAUTO had earlier launched the all-new Mazda 3 Sedan and Hatchback (CBU, July 2019), face-lifted and turbo variants of CX-5 (CKD, 22nd Oct 2019), all-new CX-8 (CKD, 13th November 2019), all-new CX-30 (CBU, 15th January 2020), 2020 Mazda CX-9, face-lifted Mazda 2 and 2020 Mazda MX-5 RF (3rd March 2020). BAUTO will introduce the face-lifted CX-3 (by 1QCY20), and all-new Mazda MX-30 (CY2021). Our TP is based on 10x CY20E EPS (at -1.0SD of its 5-year Fwd. historical PER).

Source: Kenanga Research - 2 Apr 2020