Despite ongoing aggressive sales promotions, auto sales for August still recorded a MoM decline, reflecting a persistent underlying weakness in the market. While Toyota sales were better than expected, this was likely achieved through massive price discounting, which is destabilising the market. The prospect of higher car prices is negative for the industry. Downgrade to UNDERWEIGHT.

Tepid August sales. According to data from the Malaysian Automotive Association (MAA), auto sales for August dropped 8.9% MoM to 53,452 units (+4.6% YoY). Cumulative total industry volume (TIV) for the eight months to August fell 2.3% YoY to 434,282 units, in line with our 2015 TIV forecast of 650,000 units but worse than the MAA’s expectation of stronger MoM sales for the month. With the Aidil Fitri holidays occurring in mid-July giving rise to a shorter working month, we consider auto sales for August to be somewhat soft – considering the ongoing aggressive sales and marketing promotions. This reflects muted consumer sentiment, with buyers being less predisposed towards big ticket consumer discretionary spending. In addition, we note that sales of both national car marques were unusually weaker in Aug 2014, in anticipation of the then-impending launches of the Perodua Axia and Proton Iriz.

Toyota plays catch-up. Both national car manufacturers recorded softer MoM sales in line with the broader market. However, both recorded strong YoY gains due to the impending model change-over in 2014 (production of the older Perodua Viva ceased earlier in 2014, with stocks exhausted in 2Q14 as channel inventories were refreshed with the new Axia model). YTD however, Perodua sales grew 11.6% YoY while Proton’s sales languished (-15.2% YoY), reflecting the vastly different market response to their two most recent models. Toyota sales outperformed in August, rising 9.9% MoM and 4.5% YoY, although cumulative sales for the year are still 18.8% lower YoY. After being stung by the loss of its top position in the non-national vehicle segment, Toyota has mounted a fight-back and narrowed the gap with Honda – although we believe this has been at the expense of margins.

Sector call downgraded. The automotive industry remains highly competitive and market share objectives – together with a weak MYR (and weaker sales volumes) – have contrived to compress margins. Growth prospects for the remainder of the year and going into 2016 look muted, especially if the weak currency results in higher car prices. We are downgrading our sector call to UNDERWEIGHT (from Neutral). Berjaya Auto is our sole BUY call in the sector.

Source: RHB Research - 18 Sep 2015