There was a slight sequential improvement in earnings delivery (against our expectations) by the sector in the recently-concluded 2QCY23 results. We maintain our CY23 forecast of new vehicle sales in Malaysia, also known as total industry volume (TIV), of 720k units which will match the record level achieved in CY22. The industry’s earnings visibility is still strong, backed by a booking backlog of 235k units. We now see greater opportunities in the affordable segment as it will be less affected by the introduction of a targeted fuel subsidy while the subsidy reform may dent the demand for mid-market vehicles as it will erode spending power of the M40 group. Our sector top pick is MBMR (OP; TP: RM4.70) which also offers an attractive dividend yield of more than 11%. Reiterate OVERWEIGHT.

There was a slight sequential improvement in earnings delivery (against our expectations) by the sector in the recently concluded 2QCY23 results, with 25% of the results coming in above and 75% within, versus 25% above, 50% within, and 25% below in 1QCY23. We acknowledged that 2QCY23 was seasonally soft stemming from shorter working days and plant maintenance during the festive month. BAUTO (OP; TP: RM3.10) beat expectations on a stronger blended margin with a product mix skewed towards high-margin models while SIME (OP; TP: RM2.45) was buoyed by strong earnings from BMW Malaysia. Meanwhile, the rest of the auto players met expectations.

BAUTO was driven by robust demand for high-margin all-new Mazda, Peugeot and Kia vehicles, while SIME strong local automotive operations and sustained demand for heavy equipment, more than offset its automotive distribution business in China. As we expected, HLIND (OP; TP: RM11.40) recorded a huge jump in sales (+39%) and net profit (+53%) following the economy reopening. It has recently put onto the market new-generation Y15ZR SE, XMax 250 and Ego Gear which shall drive sales in FY24. On the other hand, we were unperturbed by a weaker 2Q sequential performance from DRBHCOM (MP; TP: RM1.45), HIL (UP; TP: RM0.78), MBMR and UMW (ACCEPT OFFER; TP: RM5.00) as it stemmed from shorter working days and plant maintenance during the festive month. DRBHCOM still benefitted from high-margin Honda HR-V and new production of the all-new Honda WR-V, while HIL, MBMR and UMW continued to ride on Perusahaan Otomobil Kedua Sdn Bhd’s sustained 1HCY23 sales volume at 144,690 units (+14%). Meanwhile, TCHONG (UP: TP: RM0.80) recorded a widened loss, in line with our expectation, due to: (i) the lack of new launches while its competitors have flooded the market with attractive new models, and (ii) its inability to raise prices to pass on rising production cost, more so, amidst MYR’s weakness vs. USD.

Record year in CY22 poised to be repeated in CY23. We believe a new car is still an affordable luxury for most Malaysian households despite the high inflation and a slowing global economy. We maintain our CY23 TIV projection of 720k units that will match the record level achieved in CY22. Our projection is in-line with the forecast of 725k units by Malaysia Automotive Association (MAA).

Our optimism is underpinned by: (i) strong consumer confidence supported by a stable economy and a healthy job market, (ii) the affordability of motor vehicle underpinned by 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 potentially cheaper hire purchase cost with the introduction of the reducing balance method in the calculation of interest charges, and (iii) attractive new models. However, we now see greater opportunities in the affordable segment as it will be less affected by the introduction of a targeted fuel subsidy. This is because the subsidy reform may dent the demand for mid-market vehicles as it will erode the spending power of the M40 group.

The industry’s earnings visibility is still strong, backed by a booking backlog of 235k units which is unchanged from a month ago despite heavy deliveries. More than half of the backlogs are coming from new model launches and we expect to see similar trend throughout the year. Moreover, the recent new launches of electric vehicles such as BYD Seal, and Tesla Model 3 provide additional choice in the new growth market of electric vehicles.

Our sector top pick is MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 155k units (almost half of its CY23 target sales of 314k units), (ii) 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 attractive dividend yield of about 11%.

Source: Kenanga Research - 7 Sept 2023