Auto sales rebounded in June, as expected. The sales outlook for July is good, as buyers have returned to the market to take delivery of vehicles ahead of the upcoming festive holidays – helped by attractive seasonal offers and a strong new models pipeline. We believe auto sales will gradually improve in 2HCY13. Tan Chong and DRB-HICOM are our Top Picks in the sector. 

- A better 2HCY13. As expected, auto sales rebounded in June, gaining 8.1% m-o-m (-5.4% y-o-y) to 53,631 units, according to data from the Malaysian Automotive Association (MAA). Cumulative total industry volume (TIV) was up 4.1% to 313,488 units. The m-o-m gain reversed two consecutive months of sales declines, triggered by the wait-and-see stance adopted by consumers. We believe that the average potential car buyer has been somewhat confused by sensationalist media reporting on the possibility of lower car prices. We reiterate our view that the wait-and-see strategy is a futile one, particularly if a potential car buyer has an existing car to sell to fund the purchase of a new vehicle. We believe auto sales in July will be seasonally higher during the pre-Aidil Fitri period, helped by the aggressive promotional offers from the car companies. 

- New Proton models boost sales. Proton sales recovered 19.3% m-o-m in June from the depths plumbed in May, the lowest total monthly sales recorded since June 2007. The improvement was likely due to the launch of the Proton Saga SV (super value) in mid-June. Proton expects to sell at least 2,000 units of this model per month, with over 6,000 orders received within two weeks of launch. It likely took some sales from Perodua, which recorded sales of 15,757 units (-5.9% m-o-m and -4.1% y-o-y). 

- Key new model launches. Toyota staged the strongest rebound amongst the Big Three non-national marques – with sales up 23.0% m-o-m (-9.6% y-o-y), while Nissan gained 10% m-o-m. All three non-national marques are expected to introduce key new models in 2HCY13 including the all new Toyota Vios, Honda Accord and Nissan Grand Livina.

- Outlook. If auto sales continue to recover in 2HCY13 in line with our base case expectations, then our 2013 TIV forecast of 637,000 units is achievable. MAA is leaving its 2013 TIV forecast of 640,000 units unchanged. Bank Negara Malaysia’s recent tightening of rules for mortgage and personal loans, over concerns on rising household indebtedness, adds financing risk to regulatory risks already faced by the sector. While we do not believe a clamp down on auto financing is imminent, the impact, especially on the national car segment, could potentially be severe. 

Source: RHB