• Top Pick: Bermaz Auto (BAUTO). After two years of record high TIVs, we believe 2024 will witness a more subdued auto market as backlogs have been on a declining trend while robust car sales in the last two years were mainly delayed vehicle purchases from the pandemic years, boosted by sales tax holiday. The lack of catalysts to continue the record high TIV streak for the third successive year points to a cyclical downturn for the sector in 2024. Hence, we remain NEUTRAL on the sector.

• TIV reached historic high in 2023. Dec 2023 recorded a TIV of 78,398 units, bringing 2023 TIV to 799,731 units, up 11% YoY. This marks a record high for TIV. Sales of electrified vehicles (both hybrid and EV) or xEV rose c.70% to 38k units in 2023 – c.5% of total TIV while EV made up a smaller 2% of total TIV.

• In 2024, we expect more EVs on the road, given recently launched models ie Tesla Model 3 and Y, Neta V, and the Smart #1. Regardless, we think the EV market share will continue to hover around current levels and will only meaningfully increase post-2025 when the MYR100k pricing floor on CBU EVs is expected to expire and local carmakers have their own EV offerings.

• The known unknown – the High-Value Goods Tax (HVGT). While it is likely that big-ticket items – including luxury cars – will be subject to this newly proposed tax, the market has yet to have visibility on how this tax regime will be implemented, particularly the tax rate and value threshold set for cars subject to this tax. Though ultra-high income earners may not be sensitive to such increments, middle- to high-income earners looking for entry luxury cars may feel the impact. Another uncertainty is whether EVs are also subject to HVGT, which we believe is counter-productive as it misaligns with the Government’s push for EV adoption.

• Business-as-usual for Perodua. As more irregularities were found in relation to Daihatsu’s rigging of safety tests last December, more Perodua and Toyota models were found to be affected. Though Daihatsu has suspended its domestic operations in Japan up until end-January, we understand that it remains “business-as-usual” for Perodua’s operations in Malaysia while production of CKD kits in Japan for Malaysia and Indonesia has resumed.

• We forecast a TIV of 625k units for 2024, implying a 22% YoY decline from 2023 TIV’s 800k. Our softer TIV assumption, which is in line with the 10-year TIV average, is based on a lack of compelling factors for 2024’s auto sales to book another high. Furthermore, we believe the robust car sales in the last two years also reflected delayed purchases of big-ticket items from the pandemic years, ie 2020 and 2021.

• Remain NEUTRAL. We maintain our sector call, as we remain cautious on the outlook for 2024 – premised on a lack of catalysts to drive sales and earnings to a new high. The softening of order backlogs also suggests a more subdued expectation for this year. We continue to favour BAUTO, which is our Top Pick, given its c.9% yield and relatively resilient car sales.

• Key risks include stronger-than-expected orders and deliveries, lower- than-expected costs, and a stronger-than-expected MYR. The converse represents the downside risks.

Source: RHB Research - 26 Jan 2024