In a surprise announcement, the government announced via a memo issued to the Malaysian Automotive Association (MAA) and Malaysian Association of Malay Vehicle Importers and Traders (PEKEMA) that there will be an extension to the new vehicle sales tax exemption (including MPV and SUV) to 30th June 2021 which has been in place since 15th June 2020, and was originally scheduled to end on 31st December 2020. The percentage of sales tax exemption remains unchanged at 100% for locally-assembled (CKD) cars and 50% for fully-imported (CBU) cars. This is a positive surprise for automakers and consumers which should prompt a buying frenzy over the next few months and relieve the back-logged bookings. No changes to our 2020 TIV target at 500k units (-17% YoY), but we envisaged a stronger recovery in 2021 with TIV target at 585k units (+17% YoY). We believe the new volume-driven launches in 4QCY20 (i.e. Proton X50, Honda City and Nissan Almera) could help improve consumer sentiment with back-logged bookings to overflow into 2021 and boosted by the extension of SST exemption to 30th June 2021, seasonal promotions and new launches in the 2H of the year. Following the earnings upgrade for the SST-exempted sales extension, we now have OP call for BAUTO (RM1.70), DRBHCOM (RM2.50), MBMR (RM4.10) and UMW (RM3.85). Thus, we upgrade the sector call to OVERWEIGHT from NEUTRAL.

SST exemption extended to 30th June 2021 for passenger vehicles. In a surprise announcement, the government announced via a memo issued to the Malaysian Automotive Association (MAA) and Malaysian Association of Malay Vehicle Importers and Traders (PEKEMA) that there will be an extension to the new vehicle sales tax exemption (including MPV and SUV) to 30th June 2021. The sales tax exemption, which has been in place since 15th June 2020, was originally scheduled to end on 31st December 2020. According to the memo, the percentage of sales tax exemption remains unchanged at 100% for locally-assembled (CKD) cars and 50% for fully-imported (CBU) cars. This is a positive surprise for automakers and consumers which should prompt a buying frenzy over the next few months and relieve the back-logged bookings. The new vehicle sales tax exemption is part of the government’s Penjana programme to spur demand within the local automotive market. The sales tax exemption has resulted in reduced prices for passenger cars, although pick-up trucks are not eligible as they are classified as commercial vehicles.

Upgrade to OVERWEIGHT from NEUTRAL as we envisage stronger recovery in 2021 with TIV target at 585k units (+17% YoY). No changes to our 2020 TIV target at 500k units (-17% YoY), but we envisaged a stronger recovery in 2021 with TIV target at 585k units (+17% YoY). We believe the new volume-driven launches in 4QCY20 (i.e. Proton X50, Honda City and Nissan Almera) could help improve consumer sentiment with back-logged booking to overflow into 2021 and boosted by the extension of SST exemption to 30th June 2021, seasonal promotion and new launches in the 2H of the year. Overall, the 2021 could potentially be a better year supported by the new launches in CY2021 (eg. Perodua D55L) 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 whom might be financially challenged by Covid-19 impact. Our economics research team having the view that an expected global growth recovery and the impact of the large fiscal stimulus on domestic economy would result in a projected growth rebound in GDP to 6.1% in 2021 compared to 2020 GDP growth forecast at -5.1%.

Stronger upside for stocks under our coverage. Following our earnings upgrade as below, we upgrade rating to OUTPERFORM from MARKET PERFORM with a higher TP for the following stocks; (i) BAUTO (TP to RM1.70 from RM1.40), (ii) DRBHCOM (TP to RM2.50 from RM2.10), and (iii) MBMR (TP to RM4.10 from RM3.35). On the other hand, we maintain OUTPERFORM call with a higher TP for UMW (TP to RM3.85 from RM3.30). We maintain MARKET PERFORM call with a higher TP for (i) SIME (TP to RM2.40 from RM2.30), and (ii) TCHONG (TP to RM1.30 from RM1.00).

Source: Kenanga Research - 30 Dec 2020