Dec auto sector TIV seen to surge

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This article first appeared in The Edge Financial Daily, on December 22, 2016.


Automotive sector
Maintain underweight:
Total industry volume (TIV) in November registered a slight uptick to 49,100 units (month-on-month [m-o-m]: +2.5%, year-on-year [y-o-y]: -12.5%). Malaysian Automotive Association (MAA) attributed the slightly better sales to new model launches and very attractive offers and discounts. Biggest m-o-m gainers in November were UMW Toyota Motor Sdn Bhd (+26.4% m-o-m, -32.6% y-o-y) and Nissan by Edaran Tan Chong Motor Sdn Bhd (+23.2% m-o-m, -24.6% y-o-y) mainly due to a low base effect and the launch of Toyota Vios FL in end-October. We expect December’s TIV to see a surge as we see full impact from year-end promotions to clear inventories. Year to date, total TIV has declined by 13.7% y-o-y to 515,300 units. This constitutes 90% and 89% of our and MAA’s 2016 TIV forecast respectively.

Non-national cars’ TIV gained significant market share from 50% in October to 54% in November. Proton Holdings Bhd (-4.0% m-o-m, +2.3% y-o-y) and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) (-4.3% m-o-m, -8.8% y-o-y) disappointed as their sales volume normalised after recent new model launches. On the other hand, all non-national marques showed m-o-m growth with the exception of Mazda (-22.7% m-o-m, -36.3% y-o-y) and Volkswagen (-0.5% m-o-m, -32.9% y-o-y). Luxury marques Mercedes-Benz (+2.5% m-o-m, +5.4% y-o-y) and BMW (+8.1% m-o-m, 22.0% y-o-y) continued to impress as their target markets are less affected by stringent hire purchase loan requirements.

Companies typically offer very attractive discounts in December to clear inventories before the new year. This year is no different with marques like Proton, Perodua, Toyota, Nissan and Honda announcing discounts of up to RM10,000. For annual TIV to meet our forecast of 570,000 units, December sales would have to register 55,000 units. Due to aggressive discounts, we believe this is possible. To recap, highest monthly TIV in 2016 was registered in June with 57,300 units mainly due to Hari Raya promotional activities.

We believe headwinds for auto companies in Malaysia will continue in 2017. Firstly, sales volume will remain weak as stringent hire purchase loan requirements persist, new alternative transportation is introduced, car ownership costs increase and consumer sentiment recovers slower than expected. Additionally, margins will continue to narrow as ringgit is expected to remain weak in 2017 and companies are forced to offer discounts to clear old inventories. Lastly, there was some excitement in 2016 as Perodua launched its first sedan whilst Proton refreshed its model line-up. We note that launches in 2017 will likely pale in comparison.

We maintain our “underweight” call and TIV forecast of 570,000 units. This is given the lack of near-term rerating catalysts for the sector. In addition, stringent hire purchase loan requirements and cautious consumer sentiment continues to subdue TIV. On a brighter note, year-end discounts should boost the current weak trend in TIV numbers. — TA Research, Dec 21