We maintain OVERWEIGHT on the automotive sector and keep our 2022 TIV assumption of 600k units (+18%). There was a slight sequential deterioration in the recently concluded 2QCY22 results but we do not regard it as alarming. The results revealed robust local vehicle sales across the board, although margins differed amongst players. Out of a total of six automotive companies under our universe, one beat our forecast (BAUTO), three met expectations (MBMR, SIME and UMW) and two disappointed (DRBHCOM, and TCHONG). The robust sales were driven by car buyers rushing to lock in their purchases ahead of the initial Sales & Service Tax (SST) exemption deadline on 30 June 2022 (which was subsequently modified to include bookings made the latest by 30 June 2022 and registration completed the latest by 31 March 2023). For automotive parts, margins improved thanks to better pricing amidst shortages in the market on persistent supply-chain disruptions. Moving forward, vehicle sales over the short term will continue to be anchored by booking backlogs to the tune of some 400k units (mostly vehicles of newer models that are currently out of stock). Our sector top picks are MBMR (OP; TP: RM4.10) given its market leader’s position in national marques and BAUTO (OP; TP: RM2.30) for its attractive new models in the pipeline.

A mixed bag of results. There was a slight sequential deterioration in the recently concluded 2QCY22 results with 17%, 50%, and 33% coming in above, within and below our forecasts vs. 17%, 83% and 0% during the preceding quarter, but we do not regard it as alarming (see table on Page 2). The results revealed robust local vehicle sales across the board, although margins differed amongst players. Out of a total of six automotive companies under our universe, one beat our forecast (BAUTO), three met expectations (MBMR, SIME and UMW) and two disappointed (DRBHCOM, and TCHONG). The robust sales were driven by car buyers rushing to lock in their purchases ahead of the initial SST exemption deadline on 30 June 2022 (which was subsequently modified to include bookings made the latest by 30 June 2022 and registration completed the latest by 31 March 2023). The one that excels in term of margin are MBMR, UMW & BAUTO driven by: (i) high-margin models (i.e. Perodua Ativa, Perodua Alza, Toyota Corolla Cross, and Mazda CX-5), (ii) reduced competition at MBMR & UMW auto parts manufacturing division (amidst supply constraints in various industries), and (iii) excellent results from associates thanks to strong car sales (Perusahaan Otomobil Kedua Sdn Bhd for UMW & MBMR, and Inokom Corporation Sdn. Bhd. for BAUTO & SIME). SIME recorded fairly flat numbers on intermittent lockdown on its main operations in China, but a stronger recovery is expected as China has re-opened borders. On the other hand, DRBHCOM & TCHONG are suffering from weak margins that negated sales growth. We see that both are slowly falling out of the race as other automakers vigorously launched higher-margin all-new models that have received overwhelming response from the market.

Maintain OVERWEIGHT with 2022 TIV target of 600k units (+18%). We expect earnings in subsequent quarters to gradually normalise to pre-pandemic levels on the back of sector earnings growth of 25% in FY23 which should justify sector PER to gradually reverting closer to the mean. Positively, we expect sustainable car sales post-SST exemption period as we believe order cancellations would be minimal with demand outweighing supply given the massive back logged orders (by up to 9 months) coupled with the government’s commitment to absorb the SST for orders before 30 June 2022, and JPJ registration before 31 March 2023. Additionally, Battery Electric Vehicles (BEVs) new launches are expected to be boosted by the sales tax exemption and other EV facilities incentives up to 31 December 2025 (for CKD and CBU up to 2023) to support development of the local EV industry. Our 2022 TIV target is at 600k units (+18%) compared to MAA’s 630k units (+24%). We have reservation on MAA’s target which we believe to be premature amid persistent shortage of chips and components, but a positive sentiment is a welcome relief.

Our sector top picks are MBMR (OP; TP: RM4.10) and BAUTO (OP; TP: RM2.30). We like MBMR for its: (i) strategy to focus on affordable-priced Perodua vehicles amidst the high inflationary environment with more than 200k units of back-logged bookings, (ii) highly sought-after Tier-1 OEM auto parts manufacturing line, and (iii) position in capitalising on both front for Perodua through its 22.58% stake and role as the largest Perodua dealership. On the other hand, we like BAUTO as it offers: (i) highest number of high-margin new launches, and (ii) the highest PATAMI margin which is head and shoulders compared to peers (commanding an average of 8% compared to average PAT margin of both local and Japanese peers at 5%).

Source: Kenanga Research - 5 Sept 2022