5M14  TIV  rose  5.7%  y-o-y  mainly  due  to  a  low  base  effect.  2H14 automotive  sales  should  be  relatively  steady,  underpinned  by  a supportive  macroeconomic  environment  and  a  competitive  market place. With margins increasingly under pressure and  the rising cost of living  affecting  lower-  to  middle-income  consumers,  we  are  NEUTRAL on the sector. BUY Berjaya Auto.   
 
Positive  cumulative  sales  growth  due  to  a  low  base.  According  to data  from  the  Malaysian  Automotive  Association  (MAA),  5M14 automotive  sales  reached  274,581  units,  up  5.7%  y-o-y.  The  positive growth was mainly attributed to a lower base in 5M13, which was due to the impact of the 13th General Election in May last year, whereby buyers held back their purchases in anticipation of lower car prices.   

National  car  makers  losing  ground.  Despite  the  expansion  in  total industry volume (TIV), national car makers Proton and Perodua saw y-o-y sales contracting 1.9% and 4.3% respectively  during the period under review. The combined YTD market share of both also dropped to 43.5% from 52% in 5M13. This continued decline was attributed to the squeeze faced  by  both companies’ target  customer  base  from  higher  financing costs  as  well  as  a  reduction  in  price  premiums  between  national  and non-national marques.  

NAP  yet  to  bear  fruit.  The  National  Automotive  Policy  (NAP) announced in Jan 2014, which aims to transform Malaysia into a regional energy-efficient vehicle (EEV) hub, has yet to yield any significant results thus  far.  While  the  NAP  is  expected  to  get  the  ball  rolling  in  terms  of setting  the  tone  for  the  country’s automotive sector, it may  take  some time  before  it  reaps  the  fruit  of  its  labour.  The  increasing  market competition from the MAA’s plan to  lower  car  prices  could  result  in  a structural shift towards lower industry margins.

Outlook.  Moving  towards  2H14,  we  expect  automotive  sales  to  grow steadily,  and  be  on  track  to  reach  our  forecasted  2014  TIV  of  675,000 units. This is underpinned by a supportive macroeconomic environment, attractive new model launches and increasingly cut-throat competition in the  market  place.  We  retain  our  NEUTRAL  call  on  the  sector,  with Berjaya Auto (BAUTO MK, BUY, FV: MYR3.20) as our Top Pick. 

2014 TIV Forecast On Track

5M14 growth boosted by a low base effect  
According to MAA data, 5M14 automotive sales reached 274,581 units, up 5.7% y-o-y.  However,  we  also  note  that  the  positive  growth  was  mainly  attributed  to  a  lower base  in  5M13,  due  to  the  impact  of  the  13th  General  Election  held  last  May,  which was  preceded  by  consumer  and  business  caution.  We  expect  automotive  sales  to grow  steadily  moving  towards  2H14,  underpinned  by  a  supportive  macroeconomic environment, attractive new launches and competitive pricing from festive promotions and rebates. We deem the current sales figure to be on track to meet our forecasted 2014 TIV of 675,000 units.  
 
Festive promotions to stimulate sales in the coming months We expect sales numbers in the upcoming months to improve from the average sales of  54,916  units/month  in  Jan-May  2014,  driven  by  promotions  and  rebates  in conjunction  with  the  Aidil  Fitri  festival.  Additionally,  there  are  attractive  new  model launches  coming  up,  coupled  with  competitive  price  offerings  from  the  various marques. Incidentally, Perodua slashed prices of its Viva model by MYR3,000-5,300 in  June  as  it  looks  to  introduce  a  replacement  in  2H14.  These  promotional  efforts should  help  to  offset  growing  consumer  caution  amid  the  rising  cost  of  living  in  the lower-end market.

National Vs Non-National

National car makers losing ground  
Despite the expansion  in TIV, Proton and Perodua  y-o-y sales contracted 1.9% and 4.3%  respectively  during  the  period  under  review.  By  comparison,  during  the  same time frame, combined non-national auto sales grew 13.2% y-o-y. We believe this was the  result  of  lower-  to  middle-income  car  buyers  –  ie  the  main  target  market  of national  car  manufacturers  –  facing  higher  living  costs,  exacerbated  by  higher  hire purchase financing rates. The increasing choice  in terms of new models in the non-national  A-  and  B-segments,  as  well  as  fierce  competition  in  the  non-national  B-segment  market  among  Toyota,  Honda  and  Nissan,  has  also  reduced  the  price premiums between the national and non-national alternatives. 

Non-national car sales riding high    
We believe the positive growth in non-national car sales in 5M14  was mainly driven by  the  narrowing  price  difference  between  foreign  marques’ offerings and those of national car companies, as well as an expansion in model line-ups. Honda emerged as  the  winner  from  the  Big  Three  non-national  carmakers,  with  cumulative  sales increasing 60.5% y-o-y. Toyota came second with a 21.3% increase. Their auto sales growth  spurt  was  due  to  the  launches  of  their  key  models,  ie  the  latest  iteration  of Toyota  Vios  and  Honda  City. Meanwhile, Nissan’s  YTD  sales  declined.  This  was expected, given that its best-selling Almera model saw competition from the new Vios and City. Going forward, we expect the competition to intensify. 

Key Market Developments

Transforming Malaysia into a regional EEV hub will take time The core objective of the 2014 National Automotive Policy (NAP) is to make Malaysia the regional automotive hub for EEV, so as to claw back the head start that Thailand and Indonesia have established. Under the policy, EEV manufacturers will be allowed to establish manufacturing facilities without any restriction on engine capacity and/or selling  prices.  EEV  manufacturers  will  also  be  offered  undefined  “customised incentives”, which could include research and development (R&D) grants, soft loans and lower taxes. To date, only one EEV license has been issued. This was granted to Go  Automobile  Manufacturing  SB  to  assemble  Great  Wall  Motor  Co  Ltd  (2333  HK, NR)’s  auto products  at  its plant  in  Gurun,  Kedah. We retain  the  view  that,  while  the NAP will get the ball rolling in terms of setting the policy direction for the industry, the fruits  –  in  terms  of  attracting  foreign  direct  investments  (FDIs)  from  global  original equipment  manufacturers  (OEMs),  revitalising  automotive  exports  and  helping  to engineer lower car prices – will take time to harvest. At this juncture, given the lack of details and the “customised incentive” approach, it is too early to say whether many global OEMs will be sufficiently convinced by the new initiatives.

NAP 2014: tax incentives on hybrid and electric vehicles Tax incentives for completely built-up (CBU) hybrid vehicles under the new NAP have been  discontinued,  but  the  exemption  of  excise  duties  and  import  taxes  for  hybrids and  electric  vehicles  (EVs)  will  be  extended  for  vehicles  that  are  assembled  in Malaysia.  Hybrids  will see  an extension  until  31  Dec 2015. EVs,  on  the  other  hand, will  continue  to  see  an  exemption  until  31  Dec  2017.  Channel  checks  indicate  that more  upcoming  completely  knocked-down  (CKD)  hybrid  models  are  set  to  be launched in lieu of the incentives announced for  the CKD hybrid vehicles. This is in line with the NAP’s objective of transforming Malaysia into a regional EEV hub. 

A structural shift towards lower industry margins?

The  increasing  competition  in  the  market  is  in  line  with  the  Malaysian  Automotive Institute (MAI)’s strategy of gradually bring down car prices by as much as 30% over five  years  in  the  absence  of  any  nominal  reduction  in  automotive  tariffs.  This  could mean  a  structural  shift  towards  lower  industry  margins,  unless  countered  by  new investments to introduce  more models and variants that attract EEV incentives. Tan Chong Motor (TCM MK, NEUTRAL, FV: MYR5.60) and MBM Resources (MBM MK, NEUTRAL, FV: MYR3.05) are already experiencing margin pressure, and we expect competition  to  intensify  further  going  forward.  As  consumers  are  likely  to  become more  price  sensitive  –  with  some  trading  down  to  cheaper  models  –  auto manufacturers  could  possibly  respond  to  these  trends  by  introducing  more  model variants at lower price points.

Higher financing costs hurting national car makers The  hike  in  hire  purchase  rates  earlier  this  year  by  an  average  of  20-40bps  has closed the door on those in the lower- to middle-income group looking for car loans. As such, the hit to national car makers  has become more profound, given that their target  customer  base  comes  from  this  group.  This  is  further  exacerbated  by  higher cost of living, as well as elevated household debt levels. 

Upcoming fuel subsidy rationalisation scheme 
According  to  a  recent  media  report,  the  Secretary-General  of  the  Domestic  Trade, Cooperatives  and  Consumerism  Ministry,  Datuk  Seri  Alias  Ahmad,  stated  that  the Government will announce a new fuel subsidy system for petrol pumps on 1 Sept for commercial vehicles. A new system will be introduced for private vehicles on either 1 Oct  or  1  Nov.  The  report  also  said  that  the  new  scheme  would  be  based  on  the driver’s salary and  the  car’s  engine  capacity.  While  full  details  have  yet  to  be unveiled,  we  believe  the  upcoming  implementation  of  the  new  scheme  could  steer consumers’ preference towards EEVs  given  their  improved  fuel  economy,  vis-à-vis vehicles that do not qualify as EEVs.

Key risks 
The  main  risks  are:  i)  unexpected  regulatory changes,  ii)  unfavourable  forex  trends, iii)  the  availability  of  financing,  iv)  unpredictable  consumer  behaviour,  and  v) weakening  consumer  confidence. We  also  note  that  the  planned  introduction  of  the goods  and  services  tax  (GST)  in  April  2015  could  result  in  unpredictable  consumer behaviour towards end-2014, as the base-case expectation is for a slight reduction in car prices as the 6% GST replaces the 10% sales tax.

Maintain NEUTRAL 
We remain NEUTRAL on the sector. We expect 2H14 to see better sales volumes as 2H  is  a  seasonally  stronger  period,  although  this  may  be  tempered  by  rising competition  that  could  crimp  margins.  However,  given  that  there  are  few  near-term catalysts  to  re-rate  the  sector  higher,  we  believe  the  sector  valuation  adequately reflects the industry’s prospects. Our Top Pick remains Berjaya Auto, the distributor of Mazda vehicles in Malaysia and the Philippines. Given its focused business plan – coming off a small base – and its compelling product offerings, the company is set to register a 3-year FY13-16 EPS CAGR of 60.5%. 

Source: RHB