For 2023, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) is upbeat and guided for sales of 314k units (+11.3% YoY), ahead of our projection of 290k units (+4% YoY), to be boosted by a slew of new launches led by the all-new Perodua Axia which was launched yesterday. We raise our 2023 total industry volume (TIV) projection by 4.3% to 720k units (flat YoY) vs. the forecast of 650k (-9.8%) by the Malaysian Automotive Association (MAA). We believe the 2023 TIV will sustain at the record 2022 level underpinned by: (i) a pause in OPR hikes, (ii) stable new car prices, thanks to the deferment of new excise duty regulations (that could have resulted in prices of locally assembled vehicles increasing by 8-20%), and (iii) a healthy industry booking backlog of 350k units as at end-Jan 2023 (which is nearly half of our 2023 TIV projection of 720k units). Hence, we maintain OVERWEIGHT on the automotive sector. For our sector top picks namely MBMR and UMW, we raise our earnings forecasts by 2-7% and lift TP by 8% and 3% to RM4.80 and RM4.95, respectively.

All-new Perodua Axia 2023 igniting a good start for the year. The all-new Perodua Axia 2023 was officially launched yesterday spearheading a line-up of new launches this year. With modern sleek design and amped-up technological advancement, the new Axia has already attracted more than 20k orders on the first day (including pre-bookings/converted orders). Perodua is expecting this model to be the star of new launches this year, with a target up to 82k units (which if achieved, is a record delivery for a single car model in a year) - higher by 35% compared to the 2022 delivery for the outgoing Perodua Axia. The all-new Perodua Axia is expected to make up 25% of Perodua’s total unit sales, above the 21% recorded in 2022, overtaking Perodua Myvi as the top selling car in Malaysia. Although Perodua has been steadfast in keeping the current generation vehicles’ prices unchanged, the all-new Perodua Axia is priced higher by between 11% and 14% at RM38.6k and RM49k, for its bigger size and technological advancement. This echoes our view that all the new launches this year will be at higher prices, resulting in better margins for the auto players. See next page for visual comparison of the Axias old and new model.

MBMR and UMW’s target prices raised by 8% and 3% to RM4.80, and RM4.95, respectively. Perodua ended 2022 at 280k units (+48%) sold, above our earlier expectation of 270k units. As such, we raise Perodua’s unit sales assumptions by 4%. On the other hand, both MBMR and UMW echo Perodua’s guidance for upbeat sales in 2023 at 314k units (+11.3%), against our assumption of 290k units (+4%). As such, we raised our assumption by 8% to match its upbeat forecast. However, Toyota has not revealed their official target for 2023 yet, but indicated that delivery will still be fairly strong driven by new launches which we estimated to be at 95k units (-5%). Consequentially, we raised MBMR and UMW’s target prices by 8% and 3% to RM4.80 and RM4.95, respectively.

A preview of MBMR’s 4QFY22 results. We expect MBMR’s 4QFY22 results, due out by next week, to come in at between RM70m and RM80m at the core net profit level (up 16% to 33% sequentially), taking our cue from Perodua’s sales in 4QCY22 of 85,665 units (+24% QoQ) that brought CY22 sales to 282,019 units (+49% YoY) as reported by Malaysian Automotive Association and assuming net profit margin being sustained at c.11%. See page 4 for more details.

A preview of UMW’s 4QFY22 results. We expect UMW’s 4QFY22 results, due for release by last week of February, to come in at between RM140m and RM150m at the core net profit level (up 50% to 60% sequentially), based on Toyota’s sales in 4QCY22 of 29,909 units (+21% QoQ) that brought CY22 sales to 100,041 units (+40% YoY), as well as Perodua’s sales in 4QCY22 of 85,665 units (+24% QoQ) that brought CY22 sales to 282,019 units (+49% YoY), as reported by Malaysian Automotive Association and assuming net profit margin sustained at c.3%. See page 6 for more details.

Looking forward, we raised our 2023 total industry volume (TIV) target by 4.3% to 720k units (+0%), which is more upbeat than the forecast of 650k (-9.8%) by MAA, premised on strong reception to new launches starting with the all-new Perodua Axia 2023 (at higher prices, resulting in better margins for auto players), a pause in the OPR hike and the deferment of new excise duty regulations (that could result in prices of locally assembled vehicles increasing by 8-20%). In comparison, MAA is more cautious on the industry outlook as a whole, especially for the low-end segment, (we believe) due to the impact of high inflation on the low-income group especially with the rising cost of basic necessities.

Our new target is in line with Perodua’s conviction to deliver another record delivery of 314k units (+11.3%) with significant backlogs at 220k units to be cleared this year driven by new launches (Axia 2023 and two more face-lifted models) and sustained demand for its existing models (i.e. Alza, Bezza), while other automakers are optimistic of their new launches. An encouraging sign to note that the backlogs booking raced up to the tune of 350k units (as at end-Jan 2023) which is higher than 300k units from three months ago, indicating that deliveries have been replenished with strong new bookings especially for attractive new models (see page 8) even in the absence the SST exemption. Additionally, 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.

Gradual transition towards electrification. Both UMW and Perusahaan Otomobil Kedua Sdn Bhd are committed to gradual transition to electric vehicles. UMW shared that their Corolla Cross hybrid launched last year has received overwhelming response from the market, and together with Perusahaan Otomobil Kedua Sdn Bhd, it will gradually enhance the localisation and ecosystem of hybrid and electric vehicles, making them more affordable in the local market. UMW plan to introduce Toyota BZ4X EV in 2023/2024, while Perodua plans to introduce Perodua Ativa hybrid in 2024/2025.

Our sector top picks are:

i. MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 220k 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 Tier-1 OEM auto parts manufacturing certification.

ii. UMW for: (i) the mass-market marques under its vehicle dealership business, i.e. Toyota and Perodua, but not without high-margin models such as Perodua Alza and Toyota Veloz, (ii) strong earnings visibility at its vehicle dealership business backed by order backlogs of >250k units of vehicles, and (iii) it being a reopening play, given the pick-up seen in its heavy/industrial equipment business and manufacturing of aero-engine fan cases.

Source: Kenanga Research - 15 Feb 2023