We maintain OVERWEIGHT on the automotive sector. We project a total industry volume (TIV) of 690k units for 2023 (+2% vs. an estimated 680k for 2022), which is more upbeat than the forecast of 636k by Malaysian Automotive Association (MAA). The vehicle sales in 2023 will be driven by the continued delivery of order backlogs to tune of 350k units (as at end-Oct 2022), which was unchanged compared to three months ago, indicating strong new bookings, even in the absence of the Sales & Service Tax (SST) exemption. Our sector top picks are MBMR (OP; TP: RM4.45) and BAUTO (OP; TP: RM2.65).

We project a total industry volume (TIV) of 690k units in 2023 (+2% vs. an estimated 680k for 2022), which is more upbeat than the forecast of 636k by MAA. We believe the odds are in favour of MAA raising its number along the way.

The vehicle sales in 2023 will be driven by the continued delivery of order backlogs to the tune of 350k units (as at end-Oct 2022), which was unchanged compared to three months ago, indicating that deliveries had been replenished with strong new bookings especially for attractive new models (see next page) even in the absence the SST exemption. Additionally, the vehicle sales will be supported by launches of new battery electric vehicles (BEVs) which will enjoy SST exemption and other EV facilities incentives up to 2023 for CBU and 2025 for CKD.

We believe vehicle sales will remain robust in 2023 supported by: (i) the reopening of the economy, (ii) financial assistance to the low-income group and subsidies on fuels, electricity and selected food items to keep the cost of living in check, (iii) a relatively stable job market, and (iv) healthy household balance sheets of the M40 group.

We are unperturbed by the impact of the rising interest rates on vehicle sales. Assuming Bank Negara Malaysia is to raise the overnight policy rate (OPR) by another 25 bps to 3.00% in January 2023, taking the total OPR hike for 2022 and 2023 to a total of 125 bps (from 1.75% to 3.00%), this will only raise the monthly instalment, for say a Perodua Myvi AV priced at RM60k (90% financing margin, 5-year tenure), by about 6% from RM978 to RM1,035. We also note that the actual interest rates charged vary based on term, financiers, car models, individuals credit score, and newer popular models are most likely be charged a lower effective interest rate range.

Our sector top picks are MBMR and BAUTO.

We like MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 200k units, (ii) it being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia as well as its 22.58% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its enviable Tier-1 OEM auto parts manufacturing certification.

We like BAUTO for: (i) its premium mid-market Mazda brand that offers the best of both worlds, i.e. products that appeal to the middle-income group and yet command more superior margins than its peers in the mid-market segment, (ii) beneficiary of strengthening of the MYR against JPY; and (iii) its attractive dividend yield of about 6%.

Source: Kenanga Research - 29 Dec 2022