• Maintain OVERWEIGHT; Top Picks: Bermaz Auto (BAUTO) and UMW. February TIV of 62,649 units continued the robust momentum. We expect March TIV to be meaningfully stronger given seasonality and it being the last month for carmakers to deliver tax-exempt orders. Maintain our sector call premised on earnings visibility and attractive yields of 4-10%. We like BAUTO for its growth across three marques, and 9% FY24F (Apr) yield (with a potential special dividend in 4QFY23), and UMW as a proxy for its 38%-owned associate Perodua’s strong 2023F.

• Another strong month, unsurprisingly. February TIV came in at 62,649 units (+39% YoY, +27% MoM). Most of the marques saw MoM increases against a seasonally softer January. YoY, TIV jumped 39% mainly lifted by Perodua and Proton sales, as both national marques suffered from flood- related supply shortages in Jan and Feb 2022.

• February total production volume (TPV) rose 24% YoY, 9% MoM. The strong YoY increase was also driven by strong Proton (+59%) and Perodua (+23%) unit sales, due to the aforementioned reason. Proton’s Shah Alam plant continued to operate at full capacity, while its Tanjung Malim plant ran at a 43% utilisation rate. Perodua’s plant utilisation rate stood at 89%. Interestingly, Perodua Axia saw a 135% jump in production MoM while the other five Perodua models saw 2-25% MoM production declines, which may represent Perodua’s focus to deliver certain models before the end of March. The large MoM jump in Axia’s production was also attributable to its soft Jan 2023 production (-60% MoM), as Perodua was likely preparing the line for the all-new second generation Axia.

• Still looking at 2023F TIV of 680k. Looking ahead, we think that March TIV will be especially high, given the month has historically been very strong (as it is the fiscal year end for many Japanese principals such as Toyota, Honda, Mazda and Daihatsu), and that March will also be the final month for carmakers to deliver sales and service tax-exempt (SST) orders. While April TIV will likely soften MoM against a high base, it should nevertheless remain robust as carmakers continue to deliver on customers’ orders, which are still healthy even in the absence of the SST-exemption.

• Still OVERWEIGHT. With strong orders on hand and with supply chains constraints largely resolved, we think that the auto companies have earnings visibility for 2023. As input costs will likely remain steady from 4Q22 levels and gradually decline (with falling raw material costs and easing supply tightness), the orders should translate to deliveries and into earnings.

• Our Top Picks are UMW and BAUTO. UMW benefits from Perodua’s expected strong 2023, and for its aerospace segment’s turnaround. It also offers a decent dividend yield of c.4%. We still like BAUTO for its expected growth across all three marques, as well as its potential for special dividends in 4QFY23 (Apr). Given: i) BAUTO has declared special dividends in 4QFY21 and 4QFY22 on the back of robust results, ii) its strong balance sheet and FY23F earnings, and iii) management previously did not rule out potential special dividends, we think that a special dividend could be on the table.

• Key risks include softer-than-expected orders and deliveries, and resurgent supply chain issues.

Source: RHB Research - 23 Mar 2023