We maintain OVERWEIGHT on the automotive sector and our CY23F TIV forecast of 720k units which will match the record level achieved in CY22, and introduce our CY24F TIV forecast of 710K units. The industry’s earnings visibility is still strong, backed by a booking backlog of 235k units. We believe a new car is still an affordable luxury for most Malaysian households despite the high inflation and a slowing global economy. We now see greater opportunities in the affordable segment as it will be less affected by the targeted fuel subsidy, which 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) that focuses on the affordable segment. It also offers an attractive dividend yield of about 12%.

Resilient demand for the affordable segment. We maintain our CY23F TIV of 720k units, which will match the record level achieved in CY22 and is in-line with 725k units projected by Malaysia Automotive Association (MAA). We introduce our CY24F TIV forecast of 710K units, which eases slightly YoY due to the introduction of targeted fuel subsidy. We believe a new car is still an affordable luxury for most Malaysian households despite the high inflation and a slowing global economy. We now see greater opportunities in the affordable segment as it will be less affected by the introduction of targeted fuel subsidy that may dent the demand for mid-market vehicles as it will erode spending power of the M40 group.

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.

The industry’s earnings visibility is still strong, backed by a booking backlog of 235k units, which delivery will spill over to CY24. More than half of the backlogs are from new model launches and we expect to see similar trends throughout the year. Meanwhile, excitement is building in the electric vehicle (EV) segment with the recent new launches of BYD Seal and Tesla Model 3.

Attractive new models. In the space of local brands, both Perodua and Proton models have been selling well, being competitively priced against the non-national brands. They also offer improved technological features (i.e. digital speedometer, fuel-efficient engine and highly-responsive gearbox) and safety features (i.e. autonomous braking assistance and 4-to-6 airbags). Perodua is ahead in the new model race with the launch of the all-new Perodua Axia (improved features such as digital speedometer and emergency braking assistance) followed by two more face-lifted models this year, and one new model in early 2024 (Perodua D66B, B-segment). On the other hand, Proton recently launched the first mild-hybrid electric vehicle (MHEV) for the local brand, its all-new Proton X90, and planned to launch allnew Proton S50 (C-segment Sedan) and Proton SMART (BEV) by year-end, and five face-lifted models, all within CY23.

In the space of non-national brands, automakers are shifting away from the highly competitive low-margin segment such as 7-seater SUVs and focus on premium products that will appeal to the middle-income group such as those offered by BAUTO (OP; TP: RM3.22). Honda, for instance, replaced its 7-seater variant of Honda BR-V with WR-V (small 5-seater SUV), raking in 7,300 units in bookings and 3,300 units delivered just within a few months after launching. Car buyers are spoilt for choice with new launches including Perodua D66B (1QCY24, B-segment), Toyota Innova Zenix (3QCY23), Mazda CX-30 CKD, Peugeot Landtrek, Peugeot e-2008 (EV), Kia Sorento, Kia Sportage, Kia Carens, Honda WR-V, Honda CR-V, Toyota Vios, Toyota Yaris, Toyota GR86, Toyota GR Corrolla and Nissan Serena.

More battery electric vehicles (BEVs) in the market. Additionally, vehicle sales will be supported by new BEVs that enjoy SST exemption and other EV facilities incentives up to CY25 for CBU and CY27 for CKD. BEVs’ new registration had leapt significantly for the past two years (from 274 units in CY21 to over 3,400 units in CY22 and 7,500 units by Sept’ 2023) and is on track to meet national target for EVs and hybrid vehicles which are 15% of total industry volume (TIV) by CY30, and 38% of TIV by CY40. Meanwhile, the government’s pledge to enable charge point operators (CPOs) to secure faster approvals for installation provide comfort as currently only 1,246 EV charging stations have been built to-date.

Better margins for players. Apart from the strong booking backlog of 235k units, earnings visibility of players will also be supported by margins improvement due to new models such as all-new Perodua Axia which is priced higher by between 11% and 14% at RM38.6k and RM49k, but still garner exceptional response with average waiting period up to 6 months. The improvement in margins will also be underpinned by: (i) softening prices of commodities and key components, (ii) stabilisation of the USD/MYR exchange rate, and (iii) gradual run-down of high-cost inventory as automakers ramp up production to deliver booking backlogs.

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 12%.

Source: Kenanga Research - 4 Oct 2023