This article first appeared in The Edge Financial Daily, on October 15, 2015.

KUALA LUMPUR: The protracted slump in the ringgit’s value against all major currencies, particularly the US dollar, is eroding carmakers’ profit margins, with some expected to lose 6% of their net profits from every 1% weakening of the local currency against the US dollar.

Year to date (YTD), the ringgit, which ended trading hours on Tuesday at 4.1860 against the US dollar, has fallen 19.69% against the greenback, 19.81% against the yen, and 12.08% against the euro. The situation is worsened by slower global growth this year and the prevailing soft consumer sentiment. Already, vehicle sales for the first eight months of the year dropped 2.3% on-year to 434,282 units, prompting the Malaysian Automotive Association (MAA) to cut its 2015 total industry volume (TIV) forecast to 670,000 units from 680,000.

This leaves carmakers in a dilemma. If they raise car prices to mitigate rising costs due to the weaker ringgit, consumers may defer buying now as their disposable income shrinks due to higher costs of living, not just from the multiplier effects from the newly introduced goods and services tax, but also the sweeping toll rate hike announced on Monday that is expected to take effect today.

Although this did not not deter UMW Toyota Motor Sdn Bhd from raising the prices of Toyota and Lexus cars that it distributes by between 4% and 16% from January next year, it has certainly held back the distributors of other marques from going ahead with any price hike — so far.

Kenanga Research analyst Desmond Chong said UMW Toyota’s move could partially buffer the rising cost pressure, particularly imports (complete built-up vehicles) and components (complete knocked-down kits) costs, but he did not discount the possibility that it could weaken the marque’s sales volume. 

As it is, Toyota, which was the best-selling non-national brand in 2014, has fallen behind Honda Malaysia Sdn Bhd in the passenger marques in the the first seven months of the year (see 2015 YTD market share pie chart). On the other hand, the move could prompt consumers to buy before price adjustment, leading to a sales rise, according to TA Securities Research’s analyst Angeline Chin. Regardless, Chin, does not see the price hike announcement having any more than a minimal impact on parent company UMW Holdings Bhd’s earnings for the financial year ending Dec 31, 2015.

Meanwhile, local carmakers Proton Holdings Bhd (controlled by DRB-Hicom Bhd) and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) have both said they would maintain their car prices for the time being. Foreign carmakers or distributors — including Mercedes-Benz Malaysia Sdn Bhd, Berjaya Auto Bhd (distributor of Mazda), Ford Motor Co and BMW Malaysia Sdn Bhd — have also decided to keep the status quo, though each does not rule out the possibility of a price hike should the ringgit continue to deteriorate.

Volvo Car Malaysia Sdn Bhd managing director Keith Schafer told The Edge Financial Daily on Tuesday that Volvo’s car prices too will remain unchanged for now. “It is still too early to decide [to raise prices]. We are trying to balance our portfolio and will continue monitoring the situation. If it gets more expensive to produce here, we may consider it,” Schafer said over the phone. 

But the ringgit has regained some losses in value against the US dollar in the past week — it staged its strongest rally since 1998 on Oct 7 when it strengthened to 4.2175 against the US dollar. As such, TA Securities’ Chin does not expect other carmakers to follow in UMW Toyota’s footsteps. “The ringgit has gained in value against the US dollar; I think carmakers may need further consideration before making a decision,” she added.

But Chong pointed out that Tan Chong Motor Holdings Bhd, which distributes Nissan cars, may bow to cost pressures soon and raise prices as it has US-dollar denominated costs. “Our sensitivity test has showed that every 1% depreciation in the ringgit against the greenback could impact the bottom line of Tan Chong Motor by 6%,” he said.

Nevertheless, Kenanga Research is “neutral” on the auto sector’s outlook, with an unchanged 2015 TIV forecast of 667,000 units, as it believes auto sales will gain momentum — driven by aggressive advertising and promotion (A&P), festivities and stronger seasonal patterns — though margins will shrink.

Hong Leong Investment Bank Research(HLIB), meanwhile, downgraded its sector call to “underweight” in a report dated Sept 18, and reduced its TIV assumption for 2015 by 2% to 649,800 units. HLIB analyst Daniel Wong said the industry suffers from lower margins as a result of higher input costs, while domestic selling prices are fixed in ringgit.

“Even national original equipment manufacturers such as Proton and Perodua, which have high localisation rates of average 90% are somewhat affected by the ringgit weakening, directly from their import contents and indirectly through their supply chains, which are exposed to import contents,” he added. 

But most research houses are bullish on Berjaya Auto despite the sectoral headwinds, with eight “buy” calls at an average target price (TP) of RM2.94.

CIMB Research said in an Oct 12 note that Berjaya Auto can be held for long term, underpinned by Mazda’s growing brand equity, attractive design and right business model. Berjaya Auto shares gained seven sen or 3.47% to close at RM2.09 on Tuesday, an 81 sen or 27.55% discount to consensus TP. 

Shares in UMW (fundamental: 1.4; valuation: 1.4) climbed eight sen or 0.95% to close at RM8.47, with a market capitalisation of RM9.89 billion. 

Tan Chong Motor’s (fundamental: 0.55; valuation: 1.4) counter, which has been on the decline over the past few years, gained 11 sen or 4.35% to close at RM2.64, with a market cap of RM1.72 billion. DRB-Hicom (fundamental: 0; valuation: 2), was up one sen or 0.74% to RM1.36, bringing its market cap to RM2.63 billion. 

The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Go to www.theedgemarkets.com for more details on a company’s financial dashboard.