• Top Pick: Bermaz Auto (BAUTO). While we may see another record-highTIV in 2023, we think the market has already priced this in. The outlook for2024 remains uncertain, but we anticipate a more subdued auto market dueto the lack of catalysts to maintain sales momentum, coming off twoconsecutive record years for car sales. As such, we remain NEUTRAL onthe sector.

• A record 2023, but already priced in. August's TIV of c.72k resulted in aYTD-Aug 2023 TIV of 502k (+11.6% YoY). We think it will more likely meetour 725k TIV 2023 estimate as we conservatively assume 56k units permonth from September to December. This is lower than the trailing 12-month average monthly TIV of 64k units. While we do acknowledge that theupside risk to our assumption is present – especially if the remaining fourmonths post stronger-than-expected vehicle sales – we believe the markethas already priced in the potential of another record-breaking year in 2023.

• Slowing order backlogs point to a softer 2024. Despite a robust YTD-2023, we note that the order backlog for the major marques (Toyota andPerodua) has started easing. Perodua's order backlog as of February, Mayand August stood at 220k, 190k, and 155k, while Toyota's was at 50k, 52k,and 40k. The softening backlog supports our thesis that TIV in 2024F willlikely soften YoY, especially after two strong years in 2022 and 2023. Whilethere are upcoming launches of new EVs within the end-2023 and 2024pipelines (eg BYD Seal, BMW i5 Full Electric, and Toyota bZ4X), we do notthink this will significantly move the 2024 TIV needle.

• Budget 2024 – what to expect? As Malaysia is targeting to be a net-zerogreenhouse gas (GHG) emission country by 2050, we believe the focus forthe auto sector will be on propelling EV uptake in Malaysia, where creatinga wider EV ecosystem and incentives for EV adoption will take centre stage.This could include incentives on installing EV charging infrastructure, locallyassembled EV incentives, EV road tax reform as well as subsidies andfinancial assistance to purchase EVs.

• Outlook. We see a few compelling factors for 2024 auto sales in breach ofanother high. We think the strong TIV performance in 2022 and YTD-2023reflects pent-up consumer discretionary demand left over from 2020 and2021. Our 725k TIV forecast for 2023 implies a 4-year (2020-2023F)average annual TIV of 621k units, which is largely in line with the 10-yearpre-pandemic average of 618k units. On top of that, gross loans for thepurpose of purchasing transport vehicles rose 7.6% and 6.3% YoY in 2022and YTD-Aug 2023, while TIV rose higher by 41.6% and 11.6% in 2022 andYTD-Aug 2023. This suggests that vehicle purchases in these two yearswere mainly lower-priced models like Perodua Myvi and Axia, and ProtonSaga. While lower-priced vehicles may continue to drive TIV amidst the highinterest rate environment, we expect TIV to ease to a more normalised levelin 2024 – likely in the 600-650k unit range.

• Still NEUTRAL. We remain cautious on the softening car sales in 2024,given the uncertainty and lack of catalysts. We still favour BAUTO for itsc.9% FY24F (Apr) yield as we think its car sales will remain resilient relativeto other marques.

• Key downside risks include softer-than-expected orders and deliveries, aswell as resurgent supply chain issues. The converse represents upsiderisks.

Source: RHB Securities Research - 13 Oct 2023