• Top Picks: Bermaz Auto (BAUTO) and Sime Darby (SIME). With a new Budget 2023 to be tabled on 24 Feb, we anticipate more incentives that could help expedite EV adoption domestically – which, we believe, is still sluggish. We are still NEUTRAL on the sector, as we are expecting 2023 earnings to decline from a high base due to softening sales, and as companies’ forward valuations are mostly at or above their historical averages.

• EVs: From long waits to ready stock. Although BYD’s new Atto 3 EV has received c.1,500 orders within a month of its launch (c.1k orders in the first 10 days), we believe that the demand for EVs in Malaysia is still soft. All existing popular EV models here – such as BMW iX, Hyundai IONIQ5, Kia EV6, Mazda MX-30 – have ready stock. Although more affordable brands (eg Lingbox) are set to enter the market, we think that certain impediments to EV adoption still exist.

• Key impediments. First, many consumers find existing EVs too pricey relative to internal combustion engine (ICE) vehicles. This is mainly due to the high battery costs (c.30-40% of EV’s cost), which are expected to remain elevated in 2023. Second, customers are not used to the long charging times (30 minutes to >8 hours) – being more accustomed to the short refuelling times at petrol stations. Encouragingly, EV charging times should continue to decrease, with continued technological advancements. Third, insufficient charging infrastructure makes EV ownership challenging, in our view.

• Budget 2023: Policies that may expedite EV adoption. First, incentives to attract original equipment manufacturers to locally assemble their EVs could also incentivise them to sell domestically, thereby increasing the options and units available. Second, a longer tax-free period for EV purchases could help more buyers take advantage of the tax break when more EVs enter the market. Note that the former Budget 2023 (under the previous government) only extended the import and excise duty tax exemptions for CBU EVs by one year to end-2024, from end-2023. CKD EVs’ tax exemption period remains at end-2025. Third, direct incentives for corporations to install EV chargers can help address this impediment to adoption. Recently, the Minister of Natural Resources, Environment and Climate Change Nik Nazmi Nik Ahmad said that there will be more EV-related incentives in the revised Budget 2023.

• Excise duty reform: Unpopular amidst high cost of living. Currently, auto companies are lacking visibility on its supposed 2023 implementation. However, as the Government has just come into power and it is striving to tackle the cost of living crisis, we think that implementing the excise duty reform may lead to a step back in achieving its objective. This is because the policy will likely lift car prices, potentially by 8 to 20%, per the Malaysian Automotive Association’s estimate.

• Still NEUTRAL. While we expect a slew of strong 4Q22 earnings, we remain NEUTRAL on the sector, as we expect 2023 car sales to soften from a high 2022 base due to the lack of Sales and Services Tax exemption and higher car prices. We note that the companies’ valuations are at or above historical means, and that there is a lack of re-rating catalysts. Our Top Picks are BAUTO and SIME, for their sturdy dividend yields of 7% and 5%. Both companies also have the most EV offerings among companies under our coverage, positioning them to capture the growing EV adoption in Malaysia and in the region. Given its significant operations in China, SIME is also an attractive China reopening play. Key downside risks: Persistent macroeconomic headwinds that may further soften orders, higher-than- expected interest rates and a resurgence in supply chain constraints.

Source: RHB Research - 17 Jan 2023