• Still NEUTRAL; Top Pick: Bermaz Auto (BAUTO). We recently spoke to Hap Seng Consolidated, whose subsidiary Hap Seng Star will start implementing the agency model with Mercedes Benz Malaysia in September. Although dealerships will still have a role to play in the new model, their earnings may marginally decline. We think Sime Darby is most at risk, as European marques are most likely to adopt it soon. This report marks the transfer of coverage to Syahril Hanafiah.

• In the agency model, OEMs deal directly with customers, who can either buy their cars from the OEMs’ websites or place an order through a dealer. Key differences lie in pricing, fee structure, and risk ownership. Dealers no longer set their own prices. Instead, cars must now be sold at prices set by the OEMs. Dealers do not earn a dealership margin anymore, as they no longer purchase the inventory from the OEM nor assume the inventory risk. The OEMs are increasingly adopting this model, due to potentially higher pricing, and as it prevents price competition among the dealers while providing customers access to the nationwide inventory.

• What is the new role of the dealer? Dealers will still provide after-sales services, sell spare parts, run showrooms, provide test drives, sell used cars, and in some cases, handle paperwork. Dealers still have an incentive to maximize the number of units sold, but instead of earning the dealership margin, they now earn a fixed commission (set by OEM) for each unit sold. Instead of competing with other dealers on price, dealers now compete on customer service and experience to increase car sales.

• Is it happening in Malaysia? Mercedes Benz in July reached an agreement with its retail partners in Malaysia (eg Hap Seng Star, Cycle & Carriage) to implement the model. Volvo is already selling its EVs directly online in Malaysia. Among the various brands in Malaysia, we think European marques (eg BMW and Porsche) are the most likely to adopt the agency model in the coming years, given that they have either already adopted it in other markets, or are planning to in coming years (Figure 6). This puts Sime Darby’s motor business (45% of SIME’s FY23 EBIT) most at risk. The Japanese marques on the other hand, have not been as aggressive in adopting the agency model.

• Pros and cons to dealer. Pros include: i) Certainty in per-unit commissions (vs undercutting prices competing with other same-brand dealers), ii) cost savings from the lack of inventory holding costs. The key downside is lower profits, as the fixed commission is usually lower than the dealership margin.

• Earnings impact depends primarily on the percentage of earnings previously derived from selling new cars. The greater the percentage, the larger the impact. Note that after-sales service and the sale of spare parts are typically significantly more profitable than the sale of new cars.

• Impact to financial statements. As revenue will now reflect the fixed commission instead of the value of new cars sold, it will significantly decline. Consequently, margin (ie profitability) will be much higher, due to lower COGS and interest expense, as dealers no longer incur inventory holding and purchasing costs. This will lead to inventory and short-term borrowings also declining. Lower net income reduces operating cash flow, while lower debt will reduce financing cash flow.

• Still NEUTRAL, premised on softer 2024F car sales. Our Top Pick is still BAUTO for its resilient car sales and 9% FY24F (Apr) yield. Key downside risks: Softer-than-expected orders and deliveries, and resurgent supply chain issues. Over the medium-to-long term, the agency model also poses downside risk to earnings.

Source: RHB Securities Research - 28 Aug 2023