We upgrade the sector to OVERWEIGHT (from NEUTRAL). While our core thesis hasn’t changed, sales volumes are likely to continually surprise, and value has emerged in selected names. We raise our projection for industry-wide sales volume, i.e. total industry volume (TIV) by 8% to 800k units (flat YoY), which looks set to surpass forecast of 765k (-4%) by Malaysia Automotive Association (MAA). This is backed by strong sustained demand in the affordable segment, attractive new launches, softer-than-expected impact from e-invoicing, and a downtrading trend by mid-market buyers. BAUTO and DRBHCOM are upgraded to OUTPERFORM due to their share price action. While reiterating OUPERFORM, we raise our target price for MBMR by 3% to RM6.50 and HLIND by 7% to RM14.50. The former, MBMR (OP; TP: RM6.50), is our sector pick, being a good proxy to the affordable and fuel-efficient Perodua brand beside offering an attractive dividend yield of about 7%.

Driving into another record year. We raise our CY24 total industry volume (TIV) target by 8% to 800k units (flat YoY), which is more upbeat than the forecast of 765k (-4%) by Malaysia Automotive Association (MAA), premised on the strong demand in the affordable segment i.e. healthy order backlog of Perodua vehicles which sustained at more than 100k units despite steady monthly delivery, strong reception for new launches particularly by Chinese automakers i.e. Chery (YTD August 2024 sales at 9,689 units closing in to Mazda’s at 10,755 units) with its bestselling Chery Omoda 5 and Chery Tiggo 8 Pro (attractive pricing points for the advanced features with modern sleek design), and a downtrading trend by mid-market segments buyers amidst fuel subsidy rationalization. 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.

A two-speed automotive market locally is being played out as expected in CY24 and could stay the same until next year. 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 could also potentially benefit from the introduction of the progressive wage model. The pay rise for most civil servants (top management will receive a 7% rise, while those in professional and executive roles see a rise of 15%) 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.

The implementation of e-invoicing is having lesser impact to car sales than we initially believed. Automakers are racing to provide discounts and rebates to ensure sustained demand and lessen the impact of e-invoicing on consumer sentiment. Einvoicing essentially will cease the common practice of providing 100% hire purchase financing (under the Hire Purchase Act 1967, customers are required to make a minimum down payment of 10%). Meanwhile, the recent strengthening of MYR against USD is expected to take effect in reducing the costs for automotive parts in the 2HCY25 (as well as improving margins) as automakers usually procure inventory 6 months ahead of production to ensure supply sustainability.

In general, the industry’s earnings visibility is still good, backed by a booking backlog of 160k units as at end-August 2024, unchanged from a month ago. 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 12,850 units for the 1HCY24 (based on Ministry of Transport press release). We expect more favourable incentive from the government which 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 at 4,025 should almost triple to 10,000 by end-CY25.

Affordable segment enjoying strong demand. Strong demand in the affordable segment will continue to boost sales volume for both MBMR and HLIND. We maintain OUTPERFORM for both stocks and raise respective TPs higher.

We raise our target price for MBMR by 3% to RM6.50 from RM6.30 as we raise our FY24-FY25 net profit forecasts by 3% each to account for higher targeted Perodua vehicles sales of 350k units (from 340k units) each.

We also raise target price for HLIND by 7% to RM14.50 from RM13.50 as we raise our FY24-FY25 net profit forecasts by 7% each. We now project both Jul 2024 - Jun 2025 industry sales volume and Yamaha sales volume to increase by 7% YoY (vs. +5% previously).

We increase industry sales volume to 650k units (from 640k units) and Yamaha sales volume to 340k units (from 320k units). We are slightly more positive for FY26. For the period from Jul 2025 to Jun 2026, we projected industry and Yamaha sales volumes of 650k units and 340k units, respectively.

Value emerged. We upgrade BAUTO (TP: RM2.45) and DRBHCOM (TP: RM1.30) to OUTPERFORM from MARKET PERFORM as value has emerged after the recent correction in their respective share price by 3% and 17% (YTD 26 September 2024). Amidst the intensified competition in the local space, BAUTO has added Xpeng brand into its dealership business to counter the influx of Chinese automakers and DRBHCOM has started to implement aggressive promotion to retain market share.

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

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 (OP; 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 a third of its CY24 target sales of 350k 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 - 2 Oct 2024