Automotive sector

Downgrade to underweight: Year to date (YTD) (July), total industry volume (TIV) has been disappointing at 380,800 units, a drop of 3.2% year-on-year (y-o-y). The ongoing sales campaigns by the many original equipment manufacturers (OEMs) have failed to boost sales growth due to weakened consumer sentiment, tightened lending guidelines and the implementation of the goods and services tax (GST).

Consumers are facing deteriorating purchasing power, post implementation of the GST due to higher prices of goods and services. The weakened ringgit has further exacerbated the situation, as imported goods become more expensive.

The weakening of the ringgit also has a direct negative impact on the industry, due to imported raw materials, completely-knocked-down parts and completely-built units denominated in foreign currency. Even OEMs with high localisation rates are exposed to foreign exchange as local suppliers import raw materials and components before supplying to OEMs.

The whole automotive industry, with the exception of MBM Resources Bhd, is facing deteriorating margins from declining sales volumes, lower sales prices, higher input and operational costs, as well as a high rigid fixed-cost structure.

MBM has been reporting stronger margins due to high leverage on Perodua contributions. We expect sustainable earnings for the second half of 2015 (2H15) and 2016, on the back of continuous strong Perodua sales and the turnaround of its alloy wheel plant.

We have cut our expectation for 2015 TIV to 649,800 units, a drop of 2.5% y-o-y from 663,000 units, with growth in A and B segments being offset by lower demand in mid- and high-end segments.

YTD 2015 automotive TIV has been disappointing, especially in the second quarter of 2015 (2Q15), despite the ongoing promotions and discounts offered by OEMs.

News of job retrenchments and production plants shutting down  is making consumers prudent. If not for OEMs’ promotions, TIV would have suffered tremendously.

We expect consumer uncertainties to persist into 4Q15 and early 2016, before potential gradual recovery in consumer confidence in 2H16. Hence, we have cut our TIV assumption for 2015 to 649,800 units, a drop of 2.5% y-o-y from previous flat at 663,000 units, with growth in demand for A and B segments’ passenger cars (especially Perodua) offset by lower demand for mid- to high-end passenger cars and commercial cars.

We downgrade our rating on the sector to “underweight”, with our top pick being MBM (“buy”; target price [TP]: RM3.45) as the group is highly leveraging on Perodua sales and there is a potential turnaround of its new alloy wheel plant by 2016.

We also maintain our “buy” call on DRB-Hicom Bhd (TP: RM1.75) on cheap valuation play, and maintain “sell” on UMW Holdings Bhd and Tan Chong Motor Holdings Bhd (TCM), both facing stiff competition and margin pressure on their major marques, such as Toyota (UMW) and Nissan (TCM). — HLIB Research, Sept 18

This article first appeared in digitaledge Daily, on September 21, 2015.