INVESTMENT HIGHLIGHTS

• TIV contraction widened again to -6%yoy and also fell -8%mom versus August 2016
• August was artificially lifted by spill over deliveries, particularly for Perodua
• Proton volumes gaining traction after new Persona in August and new Saga in September
• Berjaya Auto (BUY, TP: RM2.50/share) is still our top sector pick

TIV contraction widened again in September registering a -6%yoy fall. September TIV of 48,919 units is also - 8%mom lower than the previous month – we would bear in mind that August was lifted mainly by Perodua but this was temporary given spill over deliveries from a shorter working month in July, particularly after launch of the Bezza in midJuly. Perodua sales normalised in September at 17,147 units and were the key drag to the industry’s month-on-month performance. Nonetheless, we had highlighted in our previous monthly TIV note that Perodua’s production dropped to just ~16K units despite its August TIV registering at ~21K units, signalling a possible normalisation in sales – hence the weaker month-on-month numbers should not come entirely as a surprise.

On top of this, key competitor Proton launched its offensive with the Persona replacement in August and has so far garnered pretty good bookings of over 15,000 units (within 2 months of launch) - this is well ahead of Proton’s internal 3,000-4,000 monthly sales target. The lowest variant Persona is priced similarly to the highest spec Bezza but the Persona comes with 1.6 litre engine capacities and all models come with 5-star ASEAN NCAP rating (5-star ASEAN NCAP only available for highest variant Bezza). As a result of the Persona launch in late August, Proton TIV improved sequentially registering a +37%mom growth to 6,062 units, well outperforming the industry’s -8%mom contraction while market share increased to 13% from 8%-9% levels in the prior 2 months. Proton should continue to register improvements in October given an even bigger boost from the new Saga which was launched late September. The Saga has managed to generate some 6,000 bookings in less than 3 weeks of launch and is also Proton’s largest volume driver, historically accounting for half of Proton’s volume.

Keeping our TIV forecast. Year-to-date TIV of 418,443 units, if annualised, accounts for 94% of our FY16F TIV of 593,302 units. Our forecast implies an 11%yoy contraction relative to the -14%ytd, but we note that this is an improvement versus last month’s 15%ytd contraction. We stick to our numbers as TIV should improve further in the coming months given the impact of Proton’s new Saga and a rebadged version of the Suzuki Ertiga by year end.

Earnings remain depressed, balance sheet deteriorating. TIV numbers asides, earnings for auto companies under our coverage have deteriorated as sales have been driven by aggressive campaigns and outright discounting, while the Ringgit remains relatively weak at ~RM4.20 to the USD and ~RM4.10 to the JPY(x100). We still expect UMW and Tan Chong to report losses for both FY16F and FY17F.

Maintain NEUTRAL on autos. Berjaya Auto (BUY, TP: RM2.50/share) is still our top sector pick: Key share price catalysts over the next 12 months: (1) Attractive dividend yield of 7% underpinned by solid net cash which accounts for 14% of market cap and strong FCFE yield of 10% (FY17F), (2) Further market share wins driven by new launches, i.e. the CKD Mazda 6 and diesel variants of the CX5, Mazda 2 and Mazda 6, (3) Recovery in manufacturing earnings (via 30%-owned Mazda Malaysia SB and 29%-owned Inokom) after the launch of the facelift CX5, and (4) Value unlocking from the potential listing of BAuto Philippines. Ex-cash, BAuto trades at just 10x CY17F earnings.

UMW remains a NEUTRAL at unchanged TP of RM5.30/share. UMW Oil & Gas may see further earnings pressure in 2H16 as the number of idle rigs has increased from 4 to 6 out of a total of 8 rigs. UMW’s auto division should also see some weakness in 3Q16 as the impact of the new Hilux fizzles out while the run-out of several end-of-life models will impact margins negatively. Our forecast losses for FY16F/17F are below consensus’ net profit estimates of RM217m/RM338m respectively.

Nonetheless should there be incentives in the form of excise duty exemptions for 1st car buyers (as rumoured in the past few weeks ahead of the Budget 2017 announcement), UMW Toyota could be one of the biggest beneficiaries (refer to our Auto Sector report dated 12th October 2016).

Tan Chong also remains a NEUTRAL at unchanged TP of RM1.95/share. Tan Chong’s balance sheet is increasingly stretched as a result of the demand downcycle but admittedly share price is already trading at depressed levels. However, there is no significant catalyst in the near-term to move the stock. Our forecast losses are below consensus’ FY16F/17F net profit estimates of RM33m/RM51m respectively.

Source: MIDF Research - 21 Oct 2016