It has been reported that China is considering a cut to the purchase tax for vehicles with small engines from 10% to 5%. Although the news has not been verified, Macquarie Equities Research (MQ Research) analysed its potential impact on Malaysia semicon stocks – including Inari Amertron and ViTrox Corp, in its report released yesterday.

Event

• It has been reported that China’s central government is considering to cut the purchase tax by 50% for vehicles with small engines (displacement ≤ 1.6L) from 10% to 5%. The news has not been verified but MQ Research analyses the potential impact on Malaysia semicon stocks.

Impact

• If executed as reported, the tax cut should be a mild reprieve for tech stocks, which have taken a beating (KL Tech Index vs FBMKLCI -22%/-6.2% YTD). MQ Research’s China Auto Analyst, Allen Yuan in his report ‘China Autos’, expects the net 5% reduction in auto selling prices to boost demand, based on historical experience. However, he expects the impact not to be as drastic given slower economic growth and tighter credit conditions.
• Recall, a softer outlook for automotive demand has (among others) weighed on global tech sentiment. Top Malaysian semiconductor companies have also been pivoting towards the automotive supply chain over the past year or two as consumer electronics demand began to decelerate.
• Stocks under MQ Research’s coverage that have indirect exposure include:
  • Inari Amertron (INRI MK, RM1.80, Outperform, TP: RM2.90): roughly 40% of sensors business in Kunshan serves automotive end-segment. INRI’s existing customer, Osram Licht AG (OSRn ETR, Not Rated) has an estimated 50% market share of automotive lighting.
  • Vitrox Corp. Bhd. (VITRO MK, RM7.21, Outperform, TP: RM8.00): roughly 34% of ViTrox’ EMS revenue serves the automotive industry as an end-segment while 33% of group revenue comes from China.
• Stocks MQ Research doesn’t cover that have exposure to automotive end-segments include: Pentamaster Corp Bhd (PENT MK, Not Rated) – 16% of sales are automotive-related.

Outlook

• Given the weak sentiment in the tech sector that has led to downward pressure on multiples, MQ Research sees the development as positive, especially if it leads to stronger China auto demand as anticipated by Allen Yuan.

Source: Macquarie Research - 31 Oct 2018