KUALA LUMPUR (July 26): Hong Leong Investment Bank (HLIB) Research has downgraded the automotive sector to ‘neutral’ from ‘overweight’ previously as the industry has been severely affected by the implementation of the Full Movement Control Order (FMCO).

In a note to investors today, its analyst Daniel Wong said the situation is still fluid as the government has indicated it will allow the industry to only operate in Phase 3 of the National Recovery Plan (NRP), which is expected to only take place by September or October.

Last month, the government said Malaysia will transition into Phase 3 if three key indicators were met, namely if daily Covid-19 phases fell below 2,000, ICU bed usage was sufficiently reduced, and 40% of the population have received two doses of Covid-19 vaccines. 

However, two days ago, Finance Minister Tengku Datuk Seri Zafrul Abdul Aziz was quoted as saying that the daily Covid-19 cases indicators may be revised to a "more appropriate" figure once the vaccination target is hit.

Wong said: “We still maintained our top picks with DRB-Hicom Bhd (TP [target price]: RM2.45), MBM Resources Bhd (MBMR) (TP: RM4.80) and Sime Darby Bhd (TP: RM2.68).

“DRB-Hicom will continue to leverage Proton's strong sales momentum in both domestic and export markets with attractive new models’ line-up. MBMR will also be leveraging the recovery of Perodua sales into 2022 with potential export opportunities in the medium term. On the other hand, Sime Darby is relatively unaffected by FMCO in Malaysia, as the group is mainly leveraged onto strong China and Australia markets.

“We have downgraded UMW Holdings Bhd to ‘hold’ (from 'buy') and Tan Chong Motor Holdings Bhd to ‘sell’ (from 'hold'),” he added.

Wong said the impact of FMCO on UMW is more severe and due to its low earnings base, a large part of the group's business is based domestically and the aerospace segment is being affected by the slowdown of the global aviation market.

On the brighter side with the extended sales and service tax (SST) exemption until Dec 31, HLIB expects a strong rebound in total industry volume (TIV) when the industry is allowed to fully operate.

“The industry has been enjoying brisk orders as consumers are taking advantage of the reduced car prices 2-7% (link) during the SST exemption period.

“The industry has requested the government to further extend the SST exemption measure by another six months to June 30, 2022, arguing the industry is unlikely to fulfil the huge order backlogs and new orders by end 2021 (due to the extended Phase 1) and the greater benefits of the whole industry value-chain for the eventual economic recovery,” said the Wong.

The analyst said the research firm has lowered its 2021 TIV forecasts to 480,000 units from 585,400 units due to the spike of Covid-19 cases and prolonged Phase 1 period of NRP.

“There is hope for [the] government to consider the industry’s plight to loosen up the lockdown restrictions as soon as possible, given the severe impact to the industry,” he added.

The Malaysian Automotive Association (MAA) said last week that auto sales shrank to only 1,921 units in June — a 96% drop from 47,204 units in May — mainly due to the shutdown of assembly lines as the automotive sector was not listed as an essential economic activity and the closure of showrooms during lockdown.

The association also has trimmed its 2021 total industry volume (TIV) forecast to 500,000 units from 570,000 units earlier.

MIDF Research said while this looks like a drastic cut, it is however based on the assumption that the auto sector will only resume operations in Phase 3.

MIDF Research analyst Hafriz Hezry said the research firm views the current lockdown as a temporary blip to the sector's recovery as the key resulting issue is a potential production shortfall, which hinges on timing of resumption of sector operations.

In contrast, he said demand remains relatively strong with two to four months of outstanding bookings given support from the tax holiday, cash transfers under the fiscal stimulus programs and a low interest rate environment.

“A more critical indicator to look out for, in our opinion, is achievability of the national ‘herd immunity’ target, which underpins a return to normalcy and by extension, a sustainable recovery. The pick-up in vaccination rate now lends visibility to the country’s 80% vaccination target by year-end which in turn, underscores our POSITIVE view on the sector as a recovery play.

“Notwithstanding potential recalibration of our 2021 forecast, Bermaz Auto Bhd (buy, TP: RM2.20), MBMR (buy, TP: RM4.20) and UMW (buy, TP: RM4.30) remain our top sector picks,” he noted.