Auto sector to face weak sentiment, higher expenses

This article first appeared in The Edge Financial Daily, on December 21, 2017.
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Automotive sector 
Maintain an underweight rating:
Total industry volume (TIV) grew 4.6% month-on-month (m-o-m) to 49,184 units in November 2017 due to stronger sales from both the passenger vehicle and commercial vehicle segments. The Malaysian Automotive Association (MAA) attributed the higher sales to year-end festive sales promotions. MAA expects sales in December to improve m-o-m due to new model launches and aggressive year-end promotional campaigns. 

The eleven-month of 2017 (11M17) TIV rose 1.3% year-on-year (y-o-y) to 521,940 units, driven by higher passenger vehicle sales of both national and foreign brands, which rose 1.4% and 3.0% y-o-y respectively. The growth came from various new model launches from both national and foreign brands. In addition, the stronger passenger vehicle sales were in line with the higher passenger car loan approvals, which increased 1.7% year to date. Overall, the 11M17 TIV made up 88% of our full-year TIV forecast of 597,000 units. 

Despite the improving TIV sales, MAA said total vehicle production volume fell 6.7% y-o-y to 463,993 units in 11M17. MAA attributed the lower production to the cautious stance taken by automakers, and inventory adjustments amid soft market environment.

We reduce our full-year TIV assumption marginally from 3% to 2% growth in 2017 in view of sluggish consumer sentiments and weaker-than-expected commercial vehicle sales. However, we expect higher m-o-m sales volumes in December, driven by seasonally stronger demand due to wider discounts as dealers try to reduce their inventories ahead of the new year. 

Moreover, we believe the recently launched Perodua Myvi will also help to boost TIV sales as we gather the model received over 15,000 bookings within two weeks of launch. 

We see the strengthening of the ringgit versus the US dollar and the Japanese yen as positive for the automotive sector as it will help automakers reduce the cost of imported completely knocked-down (CKD) kits and completely built-up (CBU) units. Tan Chong and UMW Holdings are winners of the ringgit’s appreciation against the US dollar given that 50% of their total manufacturing costs are denominated in US dollars. Bermaz Auto will also benefit from the appreciation of the ringgit given that 30% of its total cost of sales is denominated in Japanese yen. 

Maintain an “underweight” rating with DRB-Hicom as our top pick. We maintain our “underweight” call on the sector given the persistent weakness in consumer sentiments and potential margin erosion from higher operational expenses and intense competition. The sector trades at 1.1 times calendar year 2018 forward price-to-book value, in line with its three-year mean. — CIMB Research, December 19