This article first appeared in The Edge Financial Daily on May 21, 2018
KUALA LUMPUR: The automotive segment looks set to be the first to benefit from the new Pakatan Harapan government’s plan to abolish the goods and services tax (GST), which is expected to boost consumers’ buying sentiment.
This is because of the tax holiday that will come into the picture once the GST gets zero-rated come June 1, to pave the way for the transition to the sales and services tax (GST). This means consumers get to enjoy lower prices before the SST kicks in, which is expected to result in a temporary sales boost to automotive players.
“This will be a temporary boon to the auto sector,” Brian Yeoh, an analyst with Affin Hwang Capital Research told The Edge Financial Daily.
However, Alan Chung, executive director of indirect tax and GST at Grant Thornton, said that the price movement will be “V-shaped” as automakers cannot leave prices unchanged once the SST is reintroduced.
“Automakers can continue to enjoy zero-rating on existing stocks, for which they can still claim for GST. But once [the] SST kicks in, they will have to increase prices once again,” he said
He also pointed out that vehicle prices had been higher under the SST regime, and were subsequently lowered when the GST was introduced in 2015.
However, Yeoh said consumers will not face the “double-edged sword” of unaffordability as they did when the GST was introduced, since they will be enjoying higher purchasing power. On top of that, he believes automakers are likely to continue keeping prices competitive after the reintroduction of the SST.
Overall, the impact on the automotive sector will be fairly “neutral” although sales volume will be accelerated, said AllianceDBS Research analyst Siti Ruzanna Mohd Faruk in a note last Friday.
“Post-SST, [the] sales volume will take a dip and normalise later on,” she said, as she maintained a full-year growth forecast for total industry volume at 3%.
Beyond the GST abolition, Siti Ruzanna pointed to the new government’s plan to reduce the excise duty for imported cars below 1,600cc for first car purchases by households with a monthly income below RM8,000, which could lead to improved sales of imported cars.
This could benefit auto players such as DRB-Hicom Bhd, Tan Chong Motor Holdings Bhd, Bermaz Auto Bhd and Sime Darby Bhd, she noted, though there are no indications yet when the excise duty reduction will take place, or how much of the existing 65% to 75% excise duty rate will be reduced.
“However, for DRB-Hicom, the cannibalisation effect [of imported cars] on its Proton models may dampen its overall sales volume,” Siti Ruzanna said.
The “notable auto stock” in AllianceDBS’ coverage universe with a “buy” call that stands to benefit from all the measures outlined is Bermaz Auto Bhd, she added.
According to Bloomberg, Bermaz has 10 “buy” calls and two “hold” calls, with a 12-month consensus target price (TP) of RM2.52. The stock settled at RM2.18 last Friday, denoting a potential upside of 15.6%.
In contrast, DRB-Hicom has three “buys” and four “holds”, with a consensus TP of RM2.50. It was last traded last Friday at RM1.72. Tan Chong, which has three “buys”, six “holds” and one “sell”, with a consensus TP of RM1.81, settled at RM1.67.