• As per the Malaysian Automotive Association (MAA), June’s TIV was at 63,366 units (+25% MoM, +>100% YoY). MoM, the increase in national marques’ numbers signal a gradual easing of their supply chain issues. The c.32x YoY increase was on a low base in Jun 2021 due to lockdowns. MAA raised its 2022 TIV forecast to 630k from 600k, higher than our 615k forecast, and introduced 2023-2026F TIV, implying annual incremental growth. We keep our 2022F TIV of 615k and a NEUTRAL stance on the sector given the potential headwinds in 2023. Top picks: Sime Darby and Bermaz Auto.

• The rush to fulfil orders. June TIV rose 25% MoM against a shorter working month of May and because car brands rushed to fulfil orders in June before the Government’s announcement on 20 Jun (orders made before the end of June and delivered before end of Mar 2023 will still qualify for the sales & service tax exemption). Given the large order backlog, we see the MoM TIV growth as a sign that production is gradually improving.

• June’s total production volume (TPV) of 59,885 units (+22% MoM, >100% YoY) which confirms our thesis of improving supply dynamics. We highlight that Proton’s 32% production volume growth (Tanjung Malim and Shah Alam’s 29% and 38%) led the way with Perodua’s 10% following suit. In June, Proton’s Shah Alam plant operated at 93% capacity vs Tanjung Malim’s 39% utilisation rate, likely due to a continued shortage of some components. Perodua’s plant operated at 78% of its capacity in June, likely due supply shortage from its vendors who are still facing labour shortages.

• A much better 2Q for national marques. In 2Q22, Proton posted a 24% QoQ increase in units sold, showing its recovery from the flood-induced disruptions in January and February. Perodua’s 7% QoQ increase shows that it has also addressed some of its supply issues, by finding alternative chip producers. Most other non-national marques posted QoQ growth, as TIV rose 11% QoQ.

• MAA’s forecasts. MAA revised its 2022F TIV to 630k from 600k, mainly driven by the backlog order and pent-up demand in 1H22. MAA also introduced its 2023F TIV of 636.3k (+1% YoY), 2024F TIV of 649.03k (+2% YoY), 2025F TIV of 662.66k (+2.1% YoY), and 2026F TIV of 677.24k (+2.2%YoY). We think that its 2023F TIV target is ambitious, given the potential macroeconomic headwinds, eg higher cost of financing car purchases, elevated cost of living, and increased car prices.

• Maintain 2022F TIV of 615k (MAA: 630k) and NEUTRAL sector rating. The sector outlook remains uninspiring and we prefer the companies without national marques exposure, as we opine that the more price sensitive consumers will be disproportionately affected by said headwinds. We like Bermaz Auto for its 6% yield and continued growth in its Kia and Peugeot brands. We continue to like Sime Darby for its recovery in car sales in China, the potential special dividends from the sale of its ports assets, and potential sale of its healthcare business.

Source: RHB Research - 25 Jul 2022