Auto & Autoparts - Persistent Shortage of Components; NEUTRAL

Date: 
2022-05-24
Firm: 
RHB-OSK
Stock: 
Price Target: 
3.38
Price Call: 
HOLD
Last Price: 
3.20
Upside/Downside: 
+0.18 (5.62%)
  • Malaysian Automotive Association (MAA) data indicates April’s TIV was at 56,213 units (-3.6% YoY, -23.2% MoM). YTD TIV of 215,965 units makes up 37% of our 580,000 estimate (MAA: 600,000) for 2022. Noticeably, in April, production (-9% MoM) weighed on TIV, as the component shortage seems to have been exacerbated by China’s lockdowns. We expect supply issues to persist in the near future. We maintain FY22F TIV at 580,000, and a NEUTRAL rating on the sector. We favour MBM Resources for its FY23F 8% yield.
  • Supply issues still a dampener. TIV fell 23% MoM in April, after a record- high month. MAA attributed April’s soft TIV to chip and component shortages and shipment delays, which we believe was largely due to China’s lockdowns. Notably, Proton seems to be hit especially hard by the chip supply issues, with sales volume falling 32% MoM and 43% YoY. Meanwhile, Perodua is managing the shortage better, with sales volume falling by only 4% MoM, and rising 26% YoY. Toyota and Honda’s sales volume fell 18% and 43% MoM. According to UMW Toyota, its chip shortage situation has improved, but it is now facing a shortage of other components. Thanks to Perodua’s resilience, the national marques’ passenger market share rose 9.2ppt MoM to 68% in Apr 2022.
  • Apr 2022 total production volume (TPV): 54,734 (-9% MoM, +7% YoY). The MoM decline was mainly led by Toyota (-27%) and Honda (-29%), which we believe was likely due to the component shortage stemming from China’s lockdowns. Proton’s production declined by 6%, as the 14% decline at its Tanjung Malim plant outweighed the 3% increase at the Shah Alam plant. On a brighter note, Perodua’s production rose 5%, led by Ativa (+25%), Bezza (+14%) and MyVi (+10%) – a testament of its resilience against supply chain issues.
  • Outlook. We gather that the demand for cars remains strong, as customers continue to place orders in hopes of qualifying for the Sales & Services Tax (SST)-holiday and/or are betting on its possible extension. Note that some customers are still placing orders knowing that they will not qualify for the SST exemption, signifying healthy underlying demand. On the supply side, we opine that the component shortage will likely persist for months to come, and could worsen if more Chinese cities undergo lockdowns. Encouragingly, Proton has secured sufficient chips for production in May-June, and is rushing to fulfil orders before the end of the SST holiday.
  • A case for SST-exemption extension? While our base case still assumes that there is no extension, the Government may extend the SST exemption to help the car buyers who could not take advantage of the tax holiday, due to long wait times and supply chain issues. Also, the 15th general election may provide an additional impetus to extend the SST-holiday.
  • Maintain 2022 TIV assumption of 580,000 (MAA: 600,000). We maintain our NEUTRAL view on the sector as earnings growth could be capped by margin pressures from costlier car parts, despite the strong sales volumes.
  • Downside risks that may hamper the sector's recovery include persistent shortages of key components and delays in new model launches. With a mutating COVID-19, we cannot rule out disruptions to operations ahead. Other downside risks include the tightening of bank approvals for car loans and a sharp weakening of the MYR.

Source: RHB Research - 24 May 2022

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