• Maintain OVERWEIGHT; Top Picks: UMW and Bermaz Auto (BAUTO). Besides BAUTO’s stellar quarter, 4Q22 results of other companies under our coverage were below expectations, given our initial high estimates following a quarter that saw a record-breaking TIV of 203,758 units (+10% QoQ). Currently, orders remain resilient, as consumers are lured by new model launches. The existing order backlog provides earnings visibility, translating to attractive 4-10% yields.

• BAUTO the only outperformer, with the rest falling short. UMW and MBM Resources came in below expectations mainly weighed by their associates, where the 38%- and 20%-owned Perodua saw higher-than- expected material and labour costs (eg overtime costs) in 4Q22, weighing on healthy sales. Our channel checks with a key Perodua supplier (Betamek (BETA MK, NR)) revealed that it had started passing on higher raw material costs to Perodua during the quarter. That said, UMW’s management has indicated that Perodua’s cost has been much more manageable in 1Q23. Sime Darby fell short of expectations mainly dragged by its China auto segment, where the high COVID-19 cases disrupted its after-sales service, and where heavy discounting of vehicles continued amidst recovering supply and softening demand. Tan Chong Motor negatively surprised with a large core net loss in 4Q22, causing a net loss for the full year. BAUTO’s 9MFY23 (Apr) results blew past expectations, as its volumes and associate contributions were higher than expected.

• Orders remain surprisingly resilient, supported by new car launches. With the expiry of the sales and service tax (SST) exemption well behind us, consumers have adapted to the SST-inclusive prices again. They are once again placing orders, especially for newly launched cars. As of February, Perodua had 220k orders, which equals its pre-pandemic 5-year average sales of 219k units pa. With a sales target of 314k units (+11%), Perodua only needs 94k orders in the remainder of 2023. We think that this will be largely supported by the all-new Axia. Toyota is aiming for 93k unit sales (-8%) in 2023, and already has 50k orders. Proton and Honda are targeting 140k (+3%) and 80k (+0%) in sales volume in 2023.

• We maintain our OVERWEIGHT call, driven by the strong orders on hand, which could be further supported by more upcoming launches in 2023. The strong orders (guided by the various managements) are better than our expectations, given higher borrowing costs and persistent inflation. The lack of an excise duty reform in 2023 also removes a key uncertainty overshadowing the sector. With supply chain constraints largely dissipated, auto companies can better manage their production and convert orders into deliveries, and thus earnings.

• Top Picks: UMW and BAUTO. We like UMW as a liquid proxy for Perodua’s expected strong 2023, and for its aerospace segment’s turnaround. It also offers a decent yield of c.4%. We still like BAUTO for its expected growth across all three marques, driven by the local assembly of the Mazda CX-30, and by the continued introduction of new Kia and Peugeot models. It also offers at 9% FY24F (Apr) yield. Key risks include softer-than-expected orders and deliveries, and resurgent supply chain issues.

Source: RHB Research - 20 Mar 2023