This article first appeared in The Edge Financial Daily on January 8, 2020

Automobile sector
Maintain neutral: We maintain our “neutral” stance on the automobile sector with a total industry volume (TIV) projection of 610,000 units (1.1% growth) for 2020. We expect TIV growth in the first half of 2020 (1H20) to be supported by a sustained strong performance of national marques Proton Holdings Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua).

Other than occasional festive and year-end promotions, the automobile sector still lacks major organic growth catalysts after the goods and services tax exemption period in 2018.

Going into 1H20, we expect competition to intensify in the B-segment passenger car division. With the all-new Honda City CKD (completely knocked down), Jazz CKD and Nissan Almera CKD expected to enter the local auto market, demand for Toyota passenger cars is likely to slow down, leading to the possibility of UMW Toyota Motor Sdn Bhd dishing out price discounts to hold up its sales volume and affecting profitability margins of its automotive segment.

Non-national sport utility vehicles (SUVs) are expected to remain uncompetitive in 2020. We expect an influx of a few key SUVs and anticipate national SUVs to be priced more attractively than the non-national. The Proton X70 and X50 are well-equipped with level two automation and have more competitive pricing and better infotainment systems for a better driving experience. With these, we believe that non-national marques are likely to lose more market share to national marques due to their lack of features and unappealing pricing.

Meanwhile, the National Automotive Policy 2019 is expected to further push for initiatives to make Malaysia a regional hub for energy-efficient vehicles (EEVs). This could mean further excise duty exemption or customised incentives will be accorded to carmakers that comply with EEV standards. If this materialises, we believe that it will benefit Perodua, which has the highest concentration of EEV-certified models, improving its product pricing competitiveness and expanding its sales volume. Hence, we continue to like MBM Resources Bhd and UMW Holdings Bhd which hold strategic stakes in Perodua.

Our top picks for the sector are MBM Resources Bhd (fair value [FV]: RM5.54), DRB-Hicom Bhd (FV: RM3.18) and Pecca Group Bhd (FV: RM1.46). We think MBM Resources is currently undervalued, trading at 7.6 times forecast financial year ending Dec 31, 2020 price-earnings ratio, compared with the sector average of 12.6 times.

For DRB-Hicom, we see value gradually emerging with Proton’s vast improvement in earnings in a short span of time. We strongly believe that valuation of the stock remains attractive based on Proton’s successful turnaround that has yet to be fully priced in.

On the other hand, Pecca is another key beneficiary of Perodua’s supremacy in the sector as the sole supplier of its leather seats. — AmInvestment Bank, Jan 7