This article first appeared in The Edge Financial Daily on August 21, 2018

KUALA LUMPUR: Shares in DRB-Hicom Bhd rose as much as 9.3% yesterday, as investors reacted positively to news regarding a joint venture (JV) between its 50.1%-owned subsidiary Proton Holdings Bhd and China’s Zhejiang Geely Holding Group that will pave the way for Proton to assemble and market its cars in China.

DRB-Hicom’s stock hit an intraday high of RM2.58 before paring some gains to close at RM2.45, still up nine sen or 3.81%, bringing a market capitalisation of RM4.74 billion. It was one of the top gainers on Bursa Malaysia yesterday.

However, shares in other automotive makers did not garner as much interest from investors yesterday even though the Malaysian Automotive Association (MAA) announced last Thursday that new vehicle sales in Malaysia rose by 41% to 68,465 units in July from 48,553 units a year ago. And MAA expects sales volume for August to be maintained at the July level.

That is because analysts are expecting only a marginal acceleration in total industry volume (TIV) growth of 2% this year as the euphoria from the three-month tax holiday settles down. The zero-rated goods and services tax (GST) will end this month and the sales and services tax (SST) is introduced on Sept 1.

Shares in Tan Chong Motor Holdings Bhd, Bermaz Auto Bhd and MBM Resources Bhd (MBMR) ended the day unchanged at RM1.71, RM2.12 and RM2.38 respectively, while UMW Holdings Bhd closed slightly higher by five sen or 0.85% at RM5.90 and Sime Darby Bhd finished up one sen or 0.39% at RM2.60. Pecca Group Bhd shares were down 3.5 sen or 3.65% at 92.5 sen.

Year to date (YTD), total vehicle sales also climbed 7.6% to 358,179 units from 333,006 units a year ago.

Hong Leong Investment Bank (HLIB) Research analyst Daniel Wong said even though the YTD sales volume showed an improvement, he is maintaining his 2018 TIV assumption at 588,100 units, up 2% from 576,635 units in 2017.

“We do expect a continued strong number in August TIV, mainly due to the zero-rating of the GST, but subsequently we expect auto sales to come down quite significantly from September onwards [as the SST kicks in].

“There could be some recovery in November and December due to year-end sales campaigns, which is why we still expect to see growth of 2% in TIV for 2018,” he told The Edge Financial Daily.

CIMB Research expects the auto sector to deliver higher earnings in second quarter of 2018 (2Q18) and 3Q18, driven by stronger TIV growth due to the tax holiday, new model launches and favourable foreign exchange compared with 2017.

“Nevertheless, we think the strong earnings potential for 2018 is already reflected in the sector’s valuation as it is currently trading at 16.7 times [the 2019 forecast earnings], which is above the last industry upcycle mean of 15 times over 2010 to 2014,” the firm said in a note on the sector yesterday.

On auto stocks, Wong likes companies that leverage on Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) sales such as MBMR and Pecca.

“We are positive about Perodua as up to July, [the carmaker] has achieved 18.8% in sales growth — surpassing its 2018 target of 2%,” he said.

HLIB Research has a “buy” call on MBMR, with a target price (TP) of RM2.84, and Pecca, with a TP of RM1.35. MBMR has a 22.58% stake in Perodua, while Pecca is the main leather car seat supplier to Perodua.

Meanwhile, RHB Research said in a note yesterday that entering China will give Proton the opportunity to ride the growth of the world’s largest automotive market and reduce its dependency on the domestic market.

“The China market sold about 24 million cars in 2017 compared with some 12 million cars in 2011 — doubling in just six years. Geely has also proven itself as a prominent player in the market [as] it sold about 1.2 million cars in 2017 with a market share of 5%.

“However, the market remains fragmented with fierce competition. This could also pose a risk to Proton if it overstretches and expands too quickly before it manages to put its own house — the domestic market — in order and consolidate its manufacturing facilities,” it said.

“Overstretching could place demand on DRB-Hicom to keep funding Proton,” RHB Research added. Geely holds the remaining 49.9% in Proton.

RHB Research is maintaining its “buy” call on DRB-Hicom, with a TP of RM2.67.

“We remain positive about Proton’s turnaround with the support of Geely, and the JV is another step forward towards the right direction for Proton. On top of that, various attractive embedded assets within DRB-Hicom provide significant value accretion potential, in our view,” it added.