• Top Pick: Bermaz Auto (BAUTO). Given the anticipated gradual normalisation in car orders and the lack of catalysts to boost sales, we think that investors will turn more cautious on the auto sector. However, as the sector still offers attractive yields of 4-10%, we still see some defensive opportunities amidst the continued market uncertainty. We prefer BAUTO for its relative resilience, given its potential for incremental volume growth in FY24F (Apr). BAUTO also offers an attractive FY24F 9% yield.

• Major marques are seeing strong orders, while others are experiencing a normalisation. Currently, Perodua, Toyota and Honda are the only marques with wait times for their vehicles. With demand and supply largely normalised now, most other marques have minimal order backlogs and generally have short waiting times. Demand for the luxury marques has also normalised – as evidenced by the short wait times. The relatively resilient demand for mass-market marques suggest there could be downtrading among consumers.

• Some notable recent launches include the Proton X90, Toyota Innova Zenix and Kia Niro EV. Though the former two are 3-row 7-seaters, their prices differ vastly. The X90 is priced at MYR124k-153k, while the Toyota Innova Zenix’s pricetag ranges from MYR165k to MYR202k. At present, the former has a 1- to 3-month waiting period, while the latter has a 5-month waiting period. The Innova Zenix is a CBU model from Indonesia, and UMW Toyota currently does not have plans to assemble it locally. Although both models are expected to contribute to Proton and Toyota’s sales volumes this year, we have already factored these into our 2023 estimates. The Kia Niro EV prices start at MYR257k, and this is a CBU model from South Korea. With its high starting price, demand for this model may be lukewarm.

• Markets will increasingly price in an uncertain 2024. We think that the potential near-record car sales in 2023 are already reflected in share prices, and that market could gradually start to price in a potentially softer 2024. Given the lack of catalysts to drive car sales to near 700k units, we think that 2024 TIV could normalise to low-600k units. Moreover, the continued rate hikes and persistently high inflation continues to put pressure on consumers’ disposable income for discretionary purchases.

• Tesla Malaysia will be launched on 20 Jul, as recently confirmed by the carmaker. There has been no confirmation on which models will be sold, but since Tesla has stopped making the right-hand-drive versions of Model S and Model X, it may very likely sell the Model 3 and Model Y in Malaysia. Due to Tesla’s global fame and the brand’s novelty in Malaysia, we think that it will likely be popular in its initial months in the Malaysian market.

• We remain NEUTRAL on the sector, as the concerns over an uncertain 2024 could weigh on its outlook, after a robust 2023. Most of the stocks are also fairly priced at this juncture, ie trading near their 5-year historical averages. Despite our cautious outlook, some counters still offer attractive yields, such as UMW (4%) and MBM Resources (10%). Our Top Pick is still Bermaz Auto, as we think the cheaper Mazda CX-30 CKD model could help support sales volumes, while sales of Kia and Peugeot cars should continue growing from a low base. Key downside risks include softer-than-expected orders and deliveries, as well as resurgent supply chain issues.

Source: RHB Research - 7 Jul 2023