• Still NEUTRAL. We expect a strong 1H22, followed by potential slowdowns in 2H22, as auto distributors may face margin pressures due to higher input costs and potential discounts to support auto sales, following the sales and service tax (SST) holiday. For now, we keep our FY22F TIV of 540,000 (Malaysian Automotive Association’s (MAA) TIV: 600k). We currently do not have any BUY calls under the sector, but favour MBM Resources (MBM) for its sector-leading FY22F yield of 7%.

• Potential margin impact in 2H22? While MAA has requested for an extension of the SST exemption period, our base case assumes it will not be extended. To support sales volumes, auto distributors may provide discounts at the expense of margins, in our view. Costlier car parts may further pressure margins, with different distributors having varying abilities to pass on higher costs. We think Sime Darby (SIME) and Bermaz Auto (BAUTO), which mostly sell higher-end cars, are less likely to face margin erosion – as demand for higher-end cars tend to be more price-inelastic, especially so with the ongoing supply shortage. Conversely, national marques with more affordable brands may not be able to pass on much of the higher costs, and therefore be more susceptible to margin pressures.

• Excise duty reform in 2023? To recap, the excise duty reform was introduced by the Pakatan Harapan administration in Jan 2020, but its implementation was postponed to end 2020 and again to end 2022. The reform would change the definition of a vehicle's open market value (OMV) to include the profits and expenses incurred, during not only the manufacturing process, but also the sale. The higher OMV would result in a higher excise duty, and could raise CKD car prices by 8-20% in 2023, according to MAA. In our view, this would bring forward car sales to 2022 and reduce car sales in 2023. Though our estimates currently assume there will be no reform, pending further announcements, we highlight the downside risks to the sector, as we think the market has yet to price this in.

• FX movements to have immaterial earnings impact, for now. YTD, USD/MYR has risen 4%, and JPY/MYR has fallen 7%. While UMW and Tan Chong Motor (TCHONG) could lose from the stronger USD, the 4.20 YTD USD/MYR average is still within our FY22F USD/MYR of 4.225. Though BAUTO’s 30%-associate Mazda Malaysia (MMSB) marginally benefits from a weaker JPY, the impact is largely limited, as MMSB also buys local components in MYR.

• Maintain 540k FY22F TIV for now. While TheEdgeMarkets reported that MAA’s March TIV is at 75,449 – a monthly record high – we are awaiting official MAA TIV data for a clearer picture. Given the potential headwinds, we currently do not have any BUY calls under the sector, but favour MBM for its sector-leading FY22F yield of 7%. MBM is also relatively less impacted by aforesaid FX movements.

• Downside risks to sector recovery: Persistent shortages of key components and tightening bank approvals for car loans – both of which may adversely impact car sales. With a mutating COVID-19 virus, we cannot rule out further rolling lockdowns ahead. A sharp weakening of the MYR may adversely impact margins.

Source: RHB Research - 26 Apr 2022