Target Subsidies to Start With Diesel

Prime Minister Datuk Seri Anwar Ibrahim has announced that Malaysia initiates the reduction of fuel subsidies starting with diesel and involve only consumers in Peninsular Malaysia. However, this adjustment will be postponed for Sabah and Sarawak due to differing consumer behaviours in East Malaysia, where diesel is predominantly utilised by nearly all households. To mitigate the potential surge in the cost of goods and services in the peninsular, subsidies will be provided to traders operating diesel-powered commercial vehicles through the Subsidised Diesel Control System (SKDS) program. This program will cover 10 types of public transportation vehicles and 23 types of goods transport vehicles. Additionally, cash assistance will be extended to eligible owners of diesel vehicles, including paddy farmers and small traders. Nevertheless, the Prime Minister did not specify a timeline for the implementation of diesel subsidy rationalisation or the commencement of the targeted subsidy mechanism for RON 95 petrol. Retail prices for RON97 and RON95 petrol, as well as diesel, have been set at RM3.47, RM2.05, and RM2.15 per litre, respectively, for the period spanning May 16 to May 22.

Who Will be Affected?

According to Prime Minister, the increase in diesel price will not affect the B40 and M40 groups. The only individuals impacted by the rationalisation will be the T20 group and approximately 3.5mn foreigners. This rationalisation program is anticipated to save the government approximately RM4bn annually. To recap, Deputy Prime Minister Datuk Seri Dr. Ahmad Zahid Hamidi stated that, on average, the T20 group spends RM399 per month on RON95 petrol, whereas the B40 cluster only spends RM243 per month on subsidised fuel.

Fuel Subsidy Rationalisation to Affect Mid-Market Segment

We believe the government will implement the fuel rationalisation program in a more gradual manner as any drastic measures would lead to overwhelming burdens to citizens. We expect this program to affect the demand for mid-market automobiles, particularly among the M40 group, who may defer new car purchases or opt for smaller engine vehicles, potentially benefiting Perodua and Proton. However, we believe the impact could be mitigated by the recent introduction of Employees Provident Fund's (EPF) Account 3 withdrawal and the anticipated salary increase for civil servants by year-end. These measures would provide additional take-home cash for households, thus cushioning the impact of the fuel rationalisation policy, in our view.

Expediting the Shift to Electric Vehicles (EVs)

Meanwhile, we believe the implementation of targeted fuel subsidies would spur the demand for EV, particularly those affordable options. This may pave the way for higher adoption of hybrid car or EV in Malaysia. According to a study conducted by Tenaga Nasional Berhad (TNB), the fuel/energy costs for using EVs are 11.4% to 51% lower compared to internal combustion engine (ICE) cars. However, the government must expedite installations of EV charging points to support the EVs sales. Note that there are approximately 2,288 EV charging stations in Malaysia currently, which is a long way to go to achieve the target of 10,000 EV charging stations by 2025.

Weaker TIV in April on MoM

According to the Malaysian Automotive Association (MAA), the monthly Total Industry Volume (TIV) dropped 18.4% MoM to 58.0 units. This decline was attributed primarily to the shorter working days during the Hari Raya festive celebration. However, on a YoY basis, there was a significant increase in TIV by 21.3%, driven mainly by a surge in passenger car sales, up 25.0% compared to the same period last year (see Figure 1). YTD, the TIV reached 260.2k units, marking an 8.2% increase YoY, primarily fuelled by strong performance in the passenger car segment, which saw a growth of 11.0% to 238.2k units. This growth more than offset the decline in the commercial vehicle segment, which dropped to 22.0k units (-15.0% YoY). Looking ahead, sales in May 2024 are expected to be slightly higher than April 2024.

YTD National Car Marques Grew 0.7% YoY

Perodua experienced a robust sales growth of 15.8%, reaching 112.8k units, while Proton's sales volume remained relatively steady at 49.3k units, showing a marginal increase of 0.5% YoY. However, the collective market share of national car brands saw a slight decline, dipping from 68.3% to 68.1% in comparison to the same period last year for the overall passenger car market.

Non-National Car Registered Mixed Results

In April, non-national car brands displayed a mixed performance. Honda and Toyota showed MoM improvements, while others experienced declines ranging from 8.6% to 60.4%. YTD, the TIV for non-national car brands witnessed an 11.8% YoY increase, totalling 76.1k units. Among these brands, Honda stood out with higher sales of 26.3k units, marking an 18.7% YoY growth. In contrast, the remaining brands saw sales contractions ranging from 1.2% to 51.1%. (refer to Figure 2).

Maintain Neutral

We reiterate our Neutral recommendation for the sector. After another record-breaking year in 2023, we expect the automotive sector to normalise in 2024 and register a weaker TIV of 650k units (-18.7% YoY) due to the absence of tax incentives and a depleting order book. Maintained SELL on MBMR (TP: RM4.36) and BAuto (TP: RM2.33). We have put SIME (TP: RM2.84)’s recommendation and TP under review pending the release of its 3QFY24 financial results. We expect SIME’s Industrial division to continue reporting good performance, supported by a robust order book and strong demand from the mining sector in Australia. Nevertheless, this growth could be offset by intense competition in China’s automotive industry, leading to eroding margins.

Source: TA Research - 23 May 2024