Following the sharp MYR depreciation, market leader UMW Toyotaannounced a 4-16% price hike, effective 1 Jan 2016. Maintain SELL, with a MYR5.00 TP (from MYR5.35, 34% downside). This will open the floodgates for other auto distributors to also announce price revisions despite the stark choice of either lower margins or lower sales volumes. The outlook for the sector remains grim going into 2016.

• Toyota and Lexus car prices to increase. UMW Toyota Motor (UMW Toyota) announced that the prices for Toyota and Lexus vehicles will riseby 4-16% effective January 2016. The increases are to reflect the 24.9% YTD depreciation of the MYR against the USD. UMW’s costs of components and vehicles are denominated in USD. There was no announcement on the exact price change for each specific model. However, we expect the cheaper locally-assembled models like the Viosto see a proportionately smaller price increase given the lower USD cost exposure, while the more expensive and fully-imported models would experience a bigger percentage price increase. Also announced yesterday was a MYR990 price increase for the Perodua Axia G 1.0L, which works out to a 3.0-3.3% price increase.
• Importers are in an unenviable position. The sharp depreciation in the MYR has put importers in a difficult position, especially in the face of declining consumer sentiment. As higher living costs bite, potential buyers are already less predisposed towards big ticket consumer discretionary spending. Auto distributors essentially have to choose between lower margins or lower sales. On the flip side, we expect to see an uptick in Toyota sales volumes before the price increases take effect as buyers bring forward their purchases.
• Forecasts and risks. We lift our 2015F earnings by 7.6% but cut our 2016-2017 estimates by 9.4% and 6.1% respectively after factoring in the price changes and updating our USD/MYR assumptions. We expect2016 sales volumes to decline 7.6%, despite the imminent launch of the all-new Toyota Innova, Hilux and Fortuner in 1Q16. A weaker USD, stronger consumer sentiment and higher oil prices are the main risks.
• Maintain SELL. We believe consensus estimates for UMW remain grossly exaggerated as it continues to face competitive challenges across all its main business divisions. We cut our sum-of-parts derived TP (see Figure 3) to MYR5.00 (from MYR5.35). At our TP, the implied P/BV of 0.91x is comparable to the historical trough P/BV valuation.

Source: RHB Research - 6 Oct 2015