• Stay NEUTRAL; Top Picks: Sime Darby (SIME) and Bermaz Auto (BAUTO). While 2H22F TIV and earnings should be supported by strong backlog orders, we foresee numerous headwinds in 2023 that could weigh on car sales including: i) Softening orders, ii) potentially lower loan approval rates, iii) higher car prices, and iv) weakened consumer purchasing power. However, we think that our Top Picks are less susceptible to the said risks. Besides SIME is a beneficiary of China’s car sales recovery.

• Subdued orders. We believe that new orders have likely weakened in July and will stay subsided in the following months, as months’ worth of orders have been brought forward to June, given it was the last window of opportunity to take advantage of the Sales & Services Tax (SST) exemption. Orders should gradually recover towards the end of the year, mainly driven by new car launches, facelifts, and seasonal discounts.

• Rising OPR may dampen demand. A higher overnight policy rate (OPR) would translate to higher fixed rates on new hire purchase (HP) loans, raising the cost of financing car purchases. Consequently, banks will likely turn more cautious and auto loan approval rates may fall. We found that historically, a higher OPR coincided with lower loan approval rates (see page 2 for more details).

• Car prices could gradually inch up, in our view. Faced with costlier car parts, the principals and distributors could use new models and facelifts to raise car prices to pass on higher input costs. Moreover, customers now have to bear the SST – 10% for both CKD and CBU models. Additionally, the excise duty reform may raise car prices by 8-20% in 2023. That said, we note that the managements of the national marques are wary that they have limited room to raise car prices.

• Accelerating inflation could weaken purchasing power. At multi-year highs, Malaysia's core inflation could rise further as the Government moderates the extent of subsidies. In our view, because car purchases are discretionary, when faced with rising living costs and higher car prices, consumers that are more price sensitive may be more inclined to withhold non-essential purchases. We think that while the sales of premium marques are less likely to be impacted by rising living costs, there may be some downtrading from other marques to the more affordable national marques.

• NEUTRAL, 2023 headwinds could weigh on sector sentiment, including: i) Softer orders from purchases brought forward to June, ii) rising OPR lowering auto loan approval rates, iii) rising car prices, and iv) inflation continuing to erode consumer purchasing power. While 2H22 earnings may be strong from the fulfilment of backlog orders, we advise investors to look beyond that and position for said headwinds. We like SIME as a beneficiary of China’s car sales recovery, and potential special dividend from the sale of its non-core ports and healthcare assets. We also like BAUTO for its: i) Undemanding valuation, ii) continued growth in the Peugeot and KIA brands, and iii) customer base, which we think is less susceptible to said headwinds. We maintain our 2022F TIV of 615k, vs Malaysian Automotive Association or MMA’s 600k. Downside risks include worse-than-expected shortages of key components and delays in new model launches, mutating COVID-19 variants that could disrupt operations going forward, tightening of bank approvals for car loans, and a sharp weakening of the MYR.

Source: RHB Research - 15 Jul 2022