We remain NEUTRAL on the sector. We also maintain our projection for industry-wide sales volume, also known as total industry volume (TIV), of 740k units (-8%) in CY24, in line with the forecast of Malaysia Automotive Association (MAA). We believe while it will be business as usual for the affordable segment, fuel subsidy rationalisation will likely hurt the demand for mid-market models, giving rise to a two-speed automotive market locally in CY24. In general, the industry’s earnings visibility is still good, backed by a booking backlog of 200k units. Our sector top pick is MBMR (OP; TP: RM6.30), a good proxy to the affordable and fuelefficient Perodua brand. It also offers an attractive dividend yield of about 7%.

TIV peaked in CY23. We maintain our TIV projection of 740k units (-8%) in CY24, in-line with the forecast of Malaysia Automotive Association (MAA). We believe there will be to a two-speed automotive market locally in CY24.

It will be business as usual for the affordable segment as its target customers, i.e. the B40 group, will be spared the impact of the impending fuel subsidy rationalisation and also could potentially benefit from the introduction of the progressive wage model. The 13% pay rise for most civil servants in Dec 2024 will also partially restore their spending power eroded by high inflation. However, the same cannot be said for the mid-market segment as its target customers, i.e. the M40 group may hold back from buying a new car, or they may down trade to a smaller car or switch to an EV to cut their fuel bills) upon the introduction of fuel subsidy rationalisation.

In general, the industry’s earnings visibility is still good, backed by a booking backlog of 200k units as at end-May 2024. More than half of the backlog is made up of new models, alluding to the appeal of new models to car buyers. This trend is likely to persist throughout CY24 given a strong line-up of new launches.

Vehicle sales will also be supported by new battery electric vehicles (BEVs) that enjoy SST exemption and other EV facilities incentives up until CY25 for CBU and CY27 for CKD. The new registration for BEVs leapt from 274 units in CY21 to over 3,400 units in CY22, 10,159 units in CY23, and 6,234 units for YTD April 2024 (quarterly reporting). We expect more favourable incentive from the government that has set a national target for EVs and hybrid vehicles of 15% of TIV by CY30 and 38% by CY40. Meanwhile, the government will speed up the approval for charging stations. The number of charging stations in operation currently of 3,951 should almost triple to 10,000 by end-CY25.

Transition to energy-efficient vehicles. Apart from affordability, Perodua and Proton models have outsold non-national brands as they have also caught up in terms of specifications and features such as digital speedometer, fuel-efficient engine, highly-responsive gearbox, advanced driver assistance system, the number of airbags (4 to 6) and anti-theft autolocking system.

Perodua is putting onto the market two new models priced <RM100k, namely: (i) Perodua D66b built on the latest Daihatsu New Global Architecture platform (tentatively in early-2025); and (ii) the first Perodua EV model (tentatively in end-2025). These should give the B-segment offerings of its competitors a run for their money including Proton e.MAS EV (CBU, also priced at <RM100k, due for launching in end-2024) and Toyota Yaris Cross (due for launching early-2025). On the other hand, Proton is riding on parent Zhejiang Geely group’s technology and eco-system for the transition to EV. Proton will transition to EV in three phases, i.e. (i) Phase 1 in 2023-2027 (EV Pioneering), (ii) Phase 2 in 2025-2030 (EV growth), and (iii) Phase 3 in 2027-2030 (EV right-hand development hub). Having recently launched X50 RC, Proton will also put onto the market the X70-facelift model soon

In the space of non-national brands, we have seen the entry of Chinese and US automakers i.e. BYD, Tesla, Chery, Jaecoo, Tiggo, GAC, GWM and ORA, focusing mostly on the premium segment with a strong line-up of new EV models (see Exhibit 4), which could be in direct competition with BAUTO (MP; TP: RM2.45).

Our sector top pick is MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of more than 100k units (almost half of its CY24 target sales of 340k 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 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its attractive dividend yield of about 7%.

Source: Kenanga Research - 9 Jul 2024