Auto sector’s growth seen dependent on consumer sentiment

TheEdge Thu, Dec 13, 2018 10:39am - 5 years View Original


Auto sector
Maintain neutral:
We are “neutral” on the auto sector with a projection of 2% total industry volume (TIV) growth to 600,000 units in 2019 (from 2018 forecast: 2%-3% to 588,000-594,000). A slate of new models that coincide with the pre-Chinese New Year buying will generate excitement at the beginning of the year in an otherwise mellow market. We identify the three key items to monitor in the year ahead:

 
• Both national carmakers will launch their first sport utility vechicles (SUVs) with different priorities. Perodua will focus on sales while Proton will focus on improving consumer perception. Proton will rely on the SUV to test the various operational reforms and processes that are being introduced to win back consumer confidence. We believe that the X70 requires a strong success story in the home market before expanding regionally. Perodua will follow suit and target the more affluent segment where the financing options are said to be more secure. Both players are looking to position themselves on a more formidable ground by reducing their dependence on volume over time.

• Our house projects the US dollar to ringgit rate to be 4.12 and the overnight policy rate to be retained at 3.25% for next year. The weakening ringgit presents an immediate challenge to the margins of UMW Toyota, Tan Chong Motor and Pecca Group. These three companies have a relatively higher exposure to the unfavourable foreign exchange rate. We believe automakers will need to time their launches of new models well to capture higher sales and place priorities on sales of better margin vehicles. This is to mitigate any margin erosions from the weaker ringgit and prevent a repeat of the situation in 2016-2017. To this end, UMW has lined up the Toyota Vios to push sales volume at the open of the year. This will be followed by Toyota Yaris (by end-first half), an affordable hatchback that will also be assembled at its new plant in Shah Alam. For Pecca, we expect its automotive leather prices to remain stable. As for Tan Chong, the group may launch new Nissan models next year. It will retain its priority to focus on margins rather than volume while actively managing its inventory and debt levels. Other launches to keep an eye on include the Mazda CX-8 and Mazda 3 scheduled to come later in the year.

• The government recently indicated that it would publish the next National Automotive Policy (NAP) in the first quarter of 2019. This marks the third time it is delayed. The NAP will serve as a road map for the sector in the next four years. We understand it will continue to emphasise energy-efficient vehicles, while focusing on four key areas: connected mobility, Industrial Revolution 4.0, new-generation vehicles and artificial intelligence. The new NAP will also factor in the plan for the third national car, which has reportedly received over 20 proposals and will be led by the private sector. We understand that the NAP could also set a bigger stage for local suppliers to serve export markets as there are fewer barriers to entry for auto components compared to CBU cars.

Growth in 2019 TIV will very much depend on the performance of volume-oriented players, namely Perodua, Honda, Toyota, Nissan and Mazda. Of these, we note that Mazda has had a stupendous year (as its monthly sales rebounded to an average of 1,300 units/month from only 811 in 2017), followed by Perodua (benefiting from the late entry of the Myvi in December 2017) while Honda, Toyota and Nissan are set to round up a decent year that largely leaned on the tax holiday.

The sector still lags major organic catalysts although 2018 received a boon from the tax holiday in June-August, which accounted for 40% of 10 month of 2018 (10M18) TIV. We believe the long-term catalysts for an upgrade on the sector are: i) better consumer sentiment to drive demand; ii) for companies to be in a more solid financial position to catalyse demand with new models and better market visibility; and iii) a better macroeconomic environment to ease the obtaining of auto financing. Note that more car loans were approved this year (the approval rate averaged 59% in 9M18 as opposed to 53% in 2017), but this was largely due to the last four months to September when the rate shot up to as high as 71%.

Our “buys” are Bermaz Auto (BAuto), Pecca, MBM Resources and Tan Chong Motor. Our “buy” calls are on companies that we believe have a strong foundation to weather the sector’s tepidness and are addressing fundamental issues within their operations, if any were present. BAuto has a strong foundation in the domestic sales and exports of the CX-5 and the upcoming CX-8, Pecca is our key beneficiary of Perodua’s dominance here. — AmInvestment Bank, Dec 12

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