• Top Picks: Sime Darby (SIME) and Bermaz Auto (BAUTO). The Malaysian Automotive Association’s (MAA) TIV for May totalled 49,603 units (-12% MoM, +5% YoY). Perodua’s sharp decline (-26% MoM) singlehandedly dragged on May TIV (ex-Perodua, TIV would have risen 0.5%). Perodua’s shortfall was mainly due to planned plant shutdowns related to Aidil Fitri, and the supply shortage from a key vendor that has been experiencing a labour shortage. We maintain our 2022F TIV at 615k, as we expect record orders in June to fuel strong TIV numbers in 2H22.

• Tough month for Perodua. While several marques had softer May sales due to a shorter working month, Perodua’s sharp 26% MoM decline singlehandedly dragged May TIV down by 12% MoM. Excluding Perodua, May TIV would have risen by 0.5% MoM. According to MBM Resources’ (MBMR) management, Perodua’s shortfall was mainly due to plant shutdowns during Aidil Fitri and from the supply shortfall from a key vendor, due to the labour shortage. MBMR highlighted that its chip supply has been manageable, after it found alternative sources. Perodua aside, Proton and Toyota posted 11% and 9% increases in sales volume in May. Proton’s production rose 10% MoM, signalling improving supply. Toyota still leads in market share (13.9%) among the non-national marques, fuelled by its bestselling models – the Vios, Yaris, Corolla Cross and Hilux.

• May’s total production volume (TPV): 49,154 units (-10% MoM, +16% YoY). Again, Perodua’s outsized decline (-23% MoM) weighed on TPV, as TPV ex-Perodua rose 1% MoM. Running at c.73% of its full capacity in May, Perodua saw MoM declines in the production of all its models (we believe its vendor’s labour shortage is still in effect). Note that Perodua has stopped producing the Alza since April, as the production line is being prepared to cater for the new “Alza” model (to be launched in July). Toyota’s 20% MoM increase in production is in line with UMW Toyota (UMWT) management’s improving supply outlook. Together with MBMR’s comments, we are seeing early signs that the chip and component shortage may be abating.

• The end of the Sales and Services Tax (SST) exemption. On 20 Jun, the Government announced that the SST exemption will not be extended. Instead, vehicles ordered before 30 Jun and registered before 31 Mar 2023 will qualify for the tax relief. As per our initial hypothesis that customers will be rushing to place orders before 30 Jun, our channel check today revealed that vehicle orders are picking up pace.

• Maintain 2022F TIV of 615k (MAA: 600k) and NEUTRAL sector rating. We believe that the strong orders before 30 Jun will bring forward car sales to 2H22 from 2023. While the SST exemption’s final chapter could lift near- term earnings, there could be concerns of softer 2H22 orders and, as such, sales in end-4Q22 and 1Q23. There are also concerns of persistently high inflation, which may dampen consumer sentiment in 2023, posing further risks to demand. Inflation may also post margin compression risks to the auto players. We like SIME and BAUTO for their ability to weather inflationary pressures – given their relatively more premium marques – and for the recovery in SIME’s auto sales in China.

• Downside risks that may hamper the sector's recovery include persistent shortages of key components and delays in new model launches. Other risks: Tighter bank approvals for car loans and a weaker MYR. The opposite circumstances would present upside risks.

Source: RHB Research - 22 Jun 2022