We upgrade our sector call to OVERWEIGHT (from NEUTRAL) following the re-opening of economic activities, and further driven by buoyant recovery in car sales as evident from the growing number of back-logged bookings for popular models (up to 6 months), with stream of new higher-margin models launched in 2022 (including models that were postponed from 2021). Positively, we expect sustainable car sales post-SST exemption period as we believe order cancellations would be minimal as the demand would still outweigh the supply given the massive back-logged orders accumulated since last year coupled with the government commitment to absorb the SST for orders before 30th June 2022, with JPJ registration before 31st March 2023. Our 2022 TIV target at 600k units (+18%) is in line with MAA’s 2022 TIV target.

The sector is currently trading at trailing 12x PER which is at a 25% discount to pre-pandemic mean of 16x PER. We expect profits in subsequent quarters to gradually normalise to pre-pandemic levels on the back of sector earnings growth of 22% in FY23 which should justify sector PER to gradually reverting closer to the mean.

We prefer players with industry leading market position, and sustainable high-margin profit models. We like MBMR (OP; TP: RM4.10) given their market leading position in the national marques space. We believe the player that benefits most from high-margin new launches is BAUTO (OP; TP: RM2.30) given that it’s just added two new marques under its stable (Kia and Peugeot) with 18 new models including Mazda starting 4QCY21 until 2023.

Upgrade to OVERWEIGHT from NEUTRAL with unchanged 2022 TIV target of 600k units (+18%). The revision is driven by the re-opening of economic activities, and further boosted by buoyant recovery in car sales as evident from the growing number of back-logged bookings for popular models (up to 6 months), with stream of new higher-margin models launched in 2022 (including models that were postponed from 2021). Positively, we expect sustainable car sales post-SST exemption period as we believe order cancellations would be minimal as the demand would still outweigh the supply given the massive back-logged orders accumulated since last year coupled with the government commitment to absorb the SST for orders before 30th June 2022, with JPJ registration before 31st March 2023. Our 2022 TIV target at 600k units (+18%) is in line with MAA’s 2022 TIV target. Additionally, Battery Electric Vehicles (BEVs) new launches are expected to be boosted by full exemption on import & excise duties, sales tax, road tax, and individual tax relief of up to RM2,500 for the costs of purchase and installation as well as rental and subscription fees of EV charging facilities up to 31 December 2025 (for CKD and CBU up to 2023) to support development of the local EV industry. Nevertheless, for certain models, the recovery of car production could be limited by the on-going global constraint in semiconductor chips supply. Automakers have prioritized their usage of such resources, diverting any precious semiconductors they have to their most profitable vehicles such as full-size trucks and SUVs, as well as luxury vehicles. Malaysian Automotive Association (MAA) is vying for further SST exemption extension to end-2022 as the current chip shortages are limiting automakers’ ability to maximise production capacity to meet back-logged demand which stretched up to 6 months for certain models. Our 2022 TIV target at 600k units (+18%) is in line with MAA’s 2022 TIV target.

Discount to mean valuation is unjustified. The sector is currently trading at trailing 12x PER which is at a 25% discount to pre-pandemic mean of 16x PER. We expect profits in subsequent quarters to gradually normalise to pre-pandemic levels on the back of sector earnings growth of 22% in FY23 which should justify sector PER to gradually reverting closer to the mean.

Sustainable car sales despite the ending of SST-exempted period. We expect sustainable car sales post-SST exemption period as we believe order cancellations would be minimal as the demand would still outweigh the supply given the massive back-logged orders accumulated since last year coupled with the government commitment to absorb the SST for orders before 30th June 2022, with JPJ registration before 31st March 2023. Current backlog as shared by the Ministry of Finance (MoF) is at 264,000 units which translated into 4 to 5 months delivery queue from the supply chain disruption (based on our target of 600,000 units) which could as well to drive the back-log orders up to 9 months. This also provides assurances to the automakers to fast-track their production level and safeguard their margin if there is a need to increase the car prices given the increase in auto parts procurement costs (final car prices is reflected in the final invoice, not during the booking).

Our sector top picks are MBMR and BAUTO. We like MBMR (OP; TP: RM4.10) for its: (i) deep value stake in 22.58%- owned Perodua, and (ii) dual-income streams as the largest Perodua dealer and spare parts supplier for most of the popular marques. We like BAUTO (OP; TP: RM2.30) as it offers: (i) one of the highest dividend yields in our auto universe coverage, and (ii) the highest PATAMI margin which is head and shoulders compared to peers.

Risks to our sector rating are: (i) slower-than-expected recovery in production volume from the supply-chain disruption, (ii) lower-than-expected margin for companies under our coverage, and (iii) stricter government regulation on the automotive industry especially on excise duties calculation which could trigger pushing vehicles already selling at higher prices out of the affordable range.

Source: Kenanga Research - 21 Jun 2022