• According to Malaysian Automotive Association (MAA), August’s TIV was at 66,614 units (+36% MoM, +>100% YoY). MoM, volume for most marques rose, mainly led by Perodua and Proton, as production grew by 33%. In light of the strong YTD TIV and easing supply chain conditions, we raise 2022F TIV to 650k (MAA: 630k) from 615k, as we expect carmakers to continue ramping up production to fulfil the months-long order backlog. Top Picks: Bermaz Auto and Sime Darby.

• National marques racing ahead. TIV rose 36% MoM, with most marques' sales volumes up MoM as they continue to fulfil large order backlogs. Perodua posted a strong 42% MoM increase and Proton recorded 35% MoM growth. Notably, Proton clocked its best monthly car sales since Jul 2013, when it recorded 16,629 units sold. We attribute the MoM improvement to the recovering supply chain and production.

• August total production volume (TPV) rose 33% MoM, mainly led by Perodua (+61% MoM) and Proton (+22% MoM). Perodua's August production of 27k surprised us, as it implies a 94% utilisation rate, even amidst a continued labour shortage at its component vendors. Proton’s strong production was mainly led by the Proton Saga production (+83% MoM), which was recovering from lacklustre volumes in recent months.

• Europe’s energy crisis to worsen component shortage? While the chip shortage for many carmakers has started to ease, many are still short on various components. The ongoing – and potentially worsening – energy crisis in Europe could further exacerbate the component shortage, as European producers of various components – from glass to aluminium – face the risk of factory shutdowns. However, should this materialise, we believe there will be a minimal impact on the companies we cover, since domestic/Asia-Pacific production tends to source components regionally.

• Outlook. Orders are gradually recovering MoM and should continue to do so, as consumers adapt to the post-Sales and Services Tax prices. With Budget 2023 coming up, we expect the Government to provide greater clarity on the excise duty reform that is meant to be implemented in 2023. In line with its sustainability agenda, the Government may also introduce incentives to spur the domestic adoption and production of EVs, which may include: i) Incentives to spur EV charging, ii) incentives to spur original equipment manufacturers’ local assembly of EVs, and iii) a longer tax-free period for the purchase of EVs.

• We raise 2022F TIV to 650k (MAA: 630k) from 615k, in light of the strong YTD TIV and easing supply chain bottlenecks. Note that the YTD TIV of 447k does not include July/August figures for marques that report numbers each quarter. Our new TIV estimate has factored in the ongoing component shortage and potential worsening conditions from Europe’s energy crisis.

• Still NEUTRAL despite expectations of a strong 2H22, as we remain cautious on softening car sales in 2023, weighed by macroeconomic headwinds. Our Top Picks are Bermaz Auto and Sime Darby. 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.

Source: RHB Research - 22 Sep 2022