In a surprise announcement, the Government announced a Phase 1 total lockdown from 1st to 14th June 2021 for all economic and social sectors activities except for essential economic and service sectors which we believe to be similar to MCO 1.0 last year. Next, the transition to Phase 2, scheduled to extend for another 4 weeks after Phase 1 is expected to see a gradual re-opening of some sectors which do not involve huge gatherings operating under standard operating procedure (SOP) guidelines, and to be followed by Phase 3, expected to be similar to MCO 3.0 restrictions. The decision to move from one phase to the next will be based on the Health Ministry’s risk assessment. MITI has also confirmed that Automotive will be designated under 10% workforce warm idle operation for MCO 4.0. Our channel checks indicated that there is a strong possibility that the current SST-exempted sales for the auto sector will be extended to help boost the economy post lockdown, for another 6 months till 31st December 2021. Following the earnings downgrades which increase the lead of national marques’ market share, we maintain OUTPERFORM calls for DRBHCOM (TP: RM2.20), and MBMR (TP: RM3.50), with MARKET PERFORM calls for BAUTO (TP: RM1.30), SIME (TP: RM2.35), TCHONG (TP: RM1.10) and UMW (TP: RM3.10). Downgrade sector to NEUTRAL from OVERWEIGHT with a lower 2021 TIV target of 545k units (+3% YoY) from 585k units (+11% YoY). 

Phase 1 (1st June until 14th June 2021) Social and Economic activities total lockdown/MCO 4.0. In a surprise announcement, the Government announced via a Prime Minister statement that there will be a Phase 1 (1st June until 14th June 2021) total lockdown for all economic and social sectors activities except for essential economic and service sectors which we believe would be similar to MCO 1.0 last year. Next, the transition to Phase 2 which extends for another 4 weeks after Phase 1 will see a gradual re-opening on some sectors which do not involve huge gathering and in compliance to standard operating procedure (SOP), and to be followed by Phase 3, which will be similar to MCO 3.0. However, this transition will depend on risk evaluation by Ministry of Health (MOH). This decision by the Government was arrived at after the rapid increase in Covid-19 cases surpassing 9,000 cases/day and 2,552 deaths due to the pandemic, with new fierce variants of Covid-19. Ministry of International Trade and Industry (MITI) has also confirmed that Automotive will be designated under 10% workforce warm idle operation for MCO 4.0.

Closure of automotive sector activities, but SST exemption to be extended? With the announcement as above, we expect all the marques’ showrooms, vehicle productions and deliveries to be temporarily closed, halted and delayed for the Phase 1 period with a possibility of extension depending on the outcome with essential services such as service centres and supply parts chain services being allowed to operate. With this, there will be close to zero sales expected for June 2021 if Phase 1 were to last for 1-month period. Nevertheless, our channel checks indicated that there are strong possibilities for extension of the current SST exemption, to boost up the economy post lockdown, for another six months till 31st December 2021. Overall, we make a revision to our stocks under coverage in favour of national marques which hold more than 60% of Malaysian automotive market share. Following our earnings revision, we maintain OP call, but with lower TP for: - (i) DRBHCOM (TP to RM2.20 from RM2.50), and (ii) MBMR (TP to RM3.50 from RM4.90). For the others, we have MP call, also with lower TP for: -(i) BAUTO (TP to RM1.30 from RM1.50), (ii) SIME (TP to RM2.35 from RM2.55), (iii) TCHONG (TP to RM1.10 from RM1.25), and (iv) UMW (TP to 3.10 from RM4.35).

Downgrade to NEUTRAL from OVERWEIGHT with a lower 2021 TIV target 545k units (+3% YoY) from 585k units (+11% YoY). With the announcement as above, we expect all the marques’ show rooms, vehicle productions and deliveries to be temporarily closed, halted and delayed for the Phase 1 period mitigated by a strong possibility of the SST exemption being extended. However, TIV growth is still limited by hiccup in sales of the older models from the global chip shortage, to be offset by sufficient supply for the newer models which garner better margins. We still believe the new volume-driven launches could help spur sales along with overflowing backlogged bookings and further boosted by the expected extension of SST exemption, and seasonal promotions. Our economics research team have the view that an expected global growth recovery and the impact of the large fiscal stimulus on domestic economy would result in a projected GDP growth rebound of 6%-6.5% in 2021 (BNM: 6.0% - 7.5%; 2020: -5.6%), for now.

Source: Kenanga Research - 31 May 2021