We remain UNDERWEIGHT on the auto sector due to:

1. Tough operating environment, with 2016 demand pulled into 4Q15 on concerns off impending price hikes;

2. Weak underlying demand as consumers are increasingly cautious on spending on big-ticket discretionary items, and;

3. Dilution in margins, on the back of a weaker MYR, unfavourable sales mix and cutthroat market competition

February sales declined 15.1% MoM and 25.8% YoY to 37,875 units. Sluggish demand from consumers. We expect a difficult year for the auto players throughout 2016. We see the tough operating environment persisting through 1H16 after auto demand was brought forward into 4Q15 on expectations of impending price hikes. With the overwhelming economic uncertainties and rising cost of living, consumers are becoming more cautious and price sensitive. Hence, we expect the marques to respond through aggressive marketing and promotions, as they need to match the consumers’ expectations of a higher discount (or cashback), extended service warranty and more freebies. However, efforts from the auto distributors to increase sales might be tappering off by stringent credit approvals, as the banks are getting more concerned in maintaining their asset quality. There is also a possibility that consumers have been trading down their purchases, given the improvement of market shares by the national marques. Thus, profit margins for auto players would remain diluted, largely due to higher sales mix of cheaper models. The softer MYR, coupled with higher expenses on promotional activities would also crimp margins. While sales should gradually normalise, we forecast a 4% contraction in industry sales to 640,000 units in 2016.

Contraction in sales for the second consecutive month. As expected, total sales for February continued to plunge. According to Malaysian Automotive Association’s (MAA) data, total industry volume (TIV) for February contracted to 37,875 units (-15.1% MoM and -25.8% YoY). The lower sales volume was mainly attributed to: i) consumers bringing forward their purchases in anticipation of higher vehicle prices, ii) shorter working month due to Lunar New Year holidays, and iii) weak consumer spending patterns on big-ticket discretionary items. YTD TIV declined 18.3% YoY to 82,465 units.

Perodua dominates. Perodua’s market share increased to 35.8%, from 32.0% in 2015, as its best-selling model, Axia, continued to generate sales. However, volumes declined 9.8% MoM and 28.0% YoY to 14,014 units in February. Proton also improved its market share marginally to 16.6%, from 15.3% in 2015. The increased market share from the national marques suggests down-trading by the middle-income consumers, although 2016 sales trends continue to evolve. Honda leads the non-nationals. Honda’s YTD 2016 market share stood at 13.8%, widening its lead ahead over Toyota, which had its share declined to 7.3% from 14.5% in 2015. TIV for Toyota plunged 41.7% YoY, while Honda’s TIV declined at slower 7.1% YoY. The weaker Toyota sales are likely due to its dated product pipeline and the pending introduction of the new Innova, Fortuner and Hilux. We see Honda widening its lead over Toyota this year as it prepares to launch the all-new completely knocked down (CKD) Civic and Accord. Mazda sales dropped by 42.2% MoM and 21.3% YoY to 782 units, after a strong January, driven by the newly launched CX-3. Surprisingly, Nissan’s YTD 2016 market share of 8.3% is higher than Toyota’s although we expect this to remain a temporary occurrence.

Source: RHB Research - 21 Mar 2016