Highlights

• Malaysia Budget 2013 came in as a surprise, as it was the first time since Budget 2008, when nothing related to the automotive industry was being proposed under the budget.
• Last year (Budget 2012), the government announced: 1) extension of tax exemption for hybrid and electric vehicles to Dec 2013 (from Dec 2011); and 2) excise duty, sales tax and road tax exemptions, interest rate subsidy and assistance of RM3k for replacement of taxies and hire cars.
• This year, the market has been tic-toeing on the idea of government reducing car prices (either through lower excise duties and sales tax) as well as the implementation of vehicle end-of-life policy (previously being abandoned due to negative feedbacks from the public).

Comment

• We believe that the government is consolidating all the proposals related to the automotive industry under the coming National Automotive Policy (NAP) review, to promote holistic approach.
• We view that any cut in car prices will only be done gradually in stages and is unlikely to see drastic reduction. Similarly, end-of-life policy is deemed as unpopular move.
• As highlighted in our previous report (27 August 2012), any unplanned significant cut in excise duties/sales tax is likely to cause severe disturbance to the whole industry, such as: 1) slowdown in TIV; 2) slowdown and lower price of used car market; 3) banks and insurance portfolio of existing car value; and 4) lower than expected new car price drop.
• We anticipate that NAP is likely to further encourage the development of energy efficient car (including hybrid and EV) and position Malaysia as regional manufacturing export hub for energy efficient car (and develop the supply chain to support the new technology).
• Note that Proton is expected to receive RM120m grant to develop hybrid cars, while Honda Malaysia is investing RM350m to double its plant capacity in Melaka to manufacture hybrid cars for the regional market. VW has selected Malaysia as regional manufacturing export hub.

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy.
• Global automotive supply chain disruption.
• Sudden jump in fuel prices and interest rate.
• Depreciation of RM.

Forecasts: Unchanged.

Rating: NEUTRAL

• Positives
  • Export to regional market, i.e. Malaysia as a hub.
  • Recovery of automotive supply chain.
• Negatives
  • Implementation of responsible lending guideline
  • Instability of global automotive supply chain.

Valuation

• Top Pick: Maintain BUY on DRB (TP: RM3.43)

Source: Hong Leong Investment Bank Research - 2 Oct 2012