• TIV contraction widened but looks temporary

• Proton continues to charge on with market share gains post-Saga launch

• Currency volatility remains a key risk to sector earnings

• Bermaz Auto (BUY, TP: RM2.70/share) is our top sector pick

TIV worsened in October. At 47,879 units, October TIV contracted 14%yoy and weakened further (-0.4%mom) against Sep 2016 TIV. The weakness looks temporary as it is possibly due to wait and see among consumers ahead of Budget 2017. Rumours were rife prior to the budget announcement that a First Car Buyer Scheme would be implemented. However, it turned out that an incentive scheme offered was specifically targeted for purchase of the Iriz and for Uber driving purposes. While we don’t think year end sales campaigns this time around will be much more aggressive than the current state in the market given the weak Ringgit, we think Nov 2016 could nonetheless gain some grounds given better clarity for buyers post-Budget 2017.

Proton charges on. Proton saw further gains in market share following the launch of the Saga end September. The group bucked industry trends registering a 26%mom growth in TIV, while market share advanced to 16% from 13% in September and 9% in August. Proton is scheduled to launch a Proton compact MPV soon (a rebadged version of the Suzuki Ertiga) which will mark its final model launch this year. The model is positioned to compete against the Alza and the Sienta in terms of dimensions and space but exact specifications are not forthcoming yet. The Alza generates circa 3K-4K monthly volumes. YTD, TIV registered at 466,218 units (-14%ytd) and if annualised, is still largely short of estimates accounting for 94% of our 2016 forecast. We see possible cuts to our numbers but to be fair, most in the market would have already discounted the weak 2016 numbers. In fact, it creates a perfect backdrop for a 2017 recovery off a very weak base in 2016 and given full year impact of the national car launches which were mainly towards late 3Q16. In the past 12 months, sector market cap has shrunk by 31% as sector earnings swung into losses dragged mainly by UMW and Tan Chong. Valuations for both the stocks are largely supported by book value.

Currency volatility. The weak Ringgit is still a significant risk factor for autos going forward. The temporary strength in USD will raise import cost for auto players but the JPY weakness seen post US elections is positive for select players. UMW’s imports are totally denominated in USD, while Tan Chong has around 85% exposure to USD imports with the rest in JPY. Bermaz Auto’s imports are denominated 100% in the JPY, but it is only exposed to forex via its CBU imports which accounts for ~30% of sales. Every 1% change in JPY will impact BAuto’s FY18F (FYE April) earnings by 2% and Tan Chong by 5% (FY17F). Meanwhile every 1% change in USD will impact UMW’s earnings by 116% (FY17F) and Tan Chong’s earnings by 21% (FY17F). The extreme sensitivity for Tan Chong and UMW is due to the fact that both companies are close to break-even in terms of profitability, which results in pronounced fluctuations to bottomline from any changes in variables.

Source: MIDF Research - 21 Nov 2016