This article first appeared in The Edge Financial Daily on October 23, 2017

Automotive sector
Maintain positive: September 2017 total industry volume (TIV) hit a one-year low of 41,000 units (-21% month-on-month [m-o-m]) and took nine months of 2017 TIV to only 425,700 units (+2% year-on-year [y-o-y]), below our 2017 forecast of 610,000 units (+5% y-o-y). 

We lower our 2017 TIV expectation by 2% to 590,000 (+3% y-o-y) and introduce our 2018 TIV forecast of 610,000 units (+3% y-o-y), based on our in-house 2018 real gross domestic product growth forecast of +5.1% (2017 estimate: +5.5%). We are still positive in anticipation of a gradual earnings recovery from improving sector fundamentals, such as TIV recovery, rising auto loan approvals and a stronger ringgit. 

The m-o-m fall in volume sales was broad-based (except for BMW and Volkswagen), led by national marques. The weakness was more pronounced in Perodua (-23% m-o-m, -16% y-o-y), whereby volume sales contracted by 4,300 units as it phased out the current Myvi model (versus a 2,000-unit fall in Proton sales [-30% m-o-m, -26% y-o-y]). In the non-national segment, the m-o-m weakness was mainly at Toyota (-1,400 units) and Honda (-1,800 units). 

Despite our higher TIV expectation for the fourth quarter of 2017 (4Q17) due to seasonal factors and major model launches (Mazda CX-5 and Perodua Myvi), we now believe that our initial TIV target of 610,000 units for 2017 is unlikely to be met. Our revised TIV forecast of 590,000 units implies 165,000 units in 4Q17 (55,000 units monthly).

We believe that TIV growth in 2018 could still be slow as both Proton and Toyota will undergo transitions in their production with the former streamlining its product offering in sync with its partnership with Geely in the first half of 2018 (1H18), while the latter prepares for a shift to its new manufacturing plant in Bukit Raja in 2H18. 

For Proton, we believe that all production would eventually be in Tanjung Malim, and do not rule out the possibility of a drastic production cut at its Shah Alam plant in the process of its product rationalisation. 

For this, we believe that competing marques for both Proton and Toyota would likely have an upper hand in sales, but at the same time cap overall TIV growth for 2018. For 2018, we expect TIV growth to come from the full-year impact of Perodua’s new Myvi model, which we expect 6,000 units to be sold per month.

Bermaz Auto Bhd is our top “buy” pick as we believe that growth would resume on a refreshed product offering ( Mazda CX-5, 6, CX-8 and 3 — in order), helped by a stronger ringgit against the yen. We also like MBM Resources Bhd for its Perodua exposure for the upcoming Myvi model, and Tan Chong Motor Holdings Bhd for its price-to-book value.

Due to a shorter working month and the production scale-down of a major national model (Myvi), September 2017 total industry production (TIP) fell 13% m-o-m. Apart from Mazda and Toyota, every other major marque saw a scale-down in their production m-o-m. We believe that TIP would likely rebound in October 2017 on higher production to accommodate demand for two major model launches (CX-5 in October 2017 and Myvi, possibly in November 2017). — Maybank IB Research, Oct 19