We maintain NEUTRAL on the sector with 2020 TIV target sales of 475k units (-21% YoY). The MIER CSI (Consumer Sentiment Index) score for 2QCY20 was at 90.1 points (+39ppt QoQ, -2.9ppt YoY) that showed significant recovery which came from relaxation in the movement control order (MCO) starting May 2020, and boosted by various government assistance under PENJANA and KITA PRIHATIN. Nevertheless, the CSI remained below the optimistic threshold (>100pts) as consumers are still observing cautious spending patterns especially on high-value discretionary items with passenger vehicles loan approval rate remaining unexciting at 54.3% as of July 2020 due to stringent bank approvals on employment criteria for several economic sectors that still see high risk impact from COVID-19 restrictions i.e. aviation. We believe the upcoming new volume-driven launches in 4QCY20 (i.e. Proton X50, Honda City and Nissan Almera) could help offset the cautious consumer sentiment from the ending of loan moratorium by 30th September 2020. We upgrade rating to MARKET PERFORM from UNDERPERFORM with higher TP for the following stocks; (i) DRBHCOM (TP to RM2.10 from RM1.80), (ii) MBMR (TP to RM3.15 from RM2.80), (iii) TCHONG (TP to RM1.00 from RM0.700), and (iv) UMW (TP to RM2.70 from RM2.40). On the other hand, we maintain our MARKET PERFORM call for BAUTO (TP higher at RM1.40 from RM1.30).

Maintain NEUTRAL with unchanged TIV target of 475k units (-21% YoY). We believe the upcoming new volume-driven launches in 4QCY20 (i.e. Proton X50, Honda City and Nissan Almera) could help soften the cautious consumer sentiment from the ending of loan moratorium by 30th September 2020. Note that, MAA envisaged TIV for 2020 at 470k units (-22% YoY). We believe that sales tax exemption until end of the year may help to spur sales along with better incentives program under NAP 2020, positive impact from BNM’s overnight policy rate (OPR) cut and pre-emptive measures to assist those who might be financially challenged by Covid-19 impact. Nevertheless, we remain concerned with the economic impact from the pandemic with our economic research team having the view that 2020 GDP is expected to contract by 5.9%. Overall, 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, and cushioned by the tax exemption on passenger vehicles until the end of the year.

Significant recovery in consumer sentiment post-MCO. The Malaysian Institute of Economic Research’s (MIER) posted 90.1 points (+39ppt QoQ, -2.9ppt YoY) for its 2QCY20 Consumer Sentiment Index (CSI). The significant recovery came from relaxation in the movement control order (MCO) starting May 2020 and boosted by various government assistance under PENJANA and KITA PRIHATIN, particularly exemption in sales tax for passenger vehicles (mid-June to December 2020) and loan moratorium for 6 months up until September 2020. Nonetheless, the CSI is still below the optimistic threshold (>100pts) as consumers are still observing cautious spending patterns especially on high-value discretionary items (such as vehicles, imported goods and overseas travels), coupled with the stores’ limited operating time (under RMCO) and still-closed international borders. Note that, passenger vehicles loan approval rate remains unexciting at 54.3% as of July 2020 due to stringent bank approval on employment criteria for several economic sectors that still see high risk impact from COVID-19 restriction i.e. aviation.

Mostly weak in 2QCY20. For 2QCY20 reporting season, only one performed above expectation (SIME), and one within expectation (DRBHCOM) while others were severely below expectations (BAUTO, TCHONG, UMW and MBMR). Overall, all Automotive players suffered from the closure of businesses during the MCO, and further worsened by the unfavourable forex movement during this global outbreak. Only essential services such as SIME’s industrial segment reported stronger-thanexpected results.

Looking forward to 3QCY20/4QCY20, we expect most of the auto players to chart stronger recoveries during the sales tax exemption on passenger vehicles starting from 16th June 2020 up to the end of year which should nudge sales to fall within our targeted 2020 TIV target units of 475k (-21% YoY). Another push could come from the upcoming new launches, including the Proton X50 (CKD, 4QCY20), all-new Honda City 1.5 RS (4QCY20), and all-new Nissan Almera 1.0 turbo (4QCY20). There are also streams of other all-new launches pending pricing approvals which could lean towards CBU. With this in mind, we make a few housekeeping changes in valuation and earnings estimates to better reflect the current operating sentiment for stocks under coverage. We upgrade rating to MARKET PERFORM from UNDERPERFORM with higher TP for the following stocks; (i) DRBHCOM (TP to RM2.10 from RM1.80), (ii) MBMR (TP to RM3.15 from RM2.80), (iii) TCHONG (TP to RM1.00 from RM0.700) and (iv) UMW (TP to RM2.70 from RM2.40). On the other hand, we maintain MARKET PERFORM call for BAUTO (TP higher at RM1.40 from RM1.30) and we made no changes to SIME (MP; TP: RM2.30).

Source: Kenanga Research - 7 Oct 2020