Despite a difficult 2015, the worst is not over. Weak consumer sentimentand reduced propensity for spending on big-ticket items would mean lower auto sales. We are forecasting total industry volume (TIV) of 640,000 units this year (MAA estimate: 650,000 units). While APM hopes to secure new component supply contracts for new models planned for introduction by local OEMs, the unfavourable exchange rate and persistent pricing pressure would continue to squeeze margins. Maintain SELL with our TP tweaked slightly higher to MYR3.33 (13% downside).

Lower auto sales in 2016. The auto industry outlook would remain toughthroughout 2016 – we etimate TI to be 640,000 units in 2016, 4.0% lower YoY. This would mean lower demand from domestic original equipment manufacturers (OEMs). In the longer term, APM Automotive (APM) would be a beneficiary of the Trans-Pacific Partnership Agreement (TPPA), as this would enable auto parts producers to access larger markets for their products. Still, APM would need to achieve certain quality and efficiency standards. Dependency on key OEMs. Despite a 3.3% growth in total industry production (TIP) last year, revenue fell mainly due to lower off-take from two key OEMs, as there was no scheduled production for most months during 2H15. APM hopes to benefit from new component supply contracts to Proton and Perodua, whichare both expected to launch new models later this year. However, we note that Toyota and Nissan have not scheduled any new passenger vehicle model launch this year.

Forecasts and risks. We tweak our 2016-2017 estimates and introduce 2018 numbers. Risks to our recommendation and TP include higher industry volumes, new domestic OEM supply contracts and a stronger MYR.

Investment case. We make no change to our SELL call but lift our TP slightly to MYR3.33 (from MYR3.15) after adjusting our target P/BV higher to 0.55x (from 0.53x). The implied P/BV is close to the stock’s historical trough and we see few re-rating catalysts for now.