Auto and autoparts sectors
Maintain “neutral”: Softer second half of 2014 (2H14) sales caught the industry by surprise. The softer auto sales beginning in 2H14 were unexpected, catching many industry players off guard, especially after a robust June quarter. The 11 months of 2014 (11M14) total industry volume only reached 601,785 units (+1.1% year-on-year [y-o-y]) with sales for 2014 likely to miss earlier forecasts of 675,000 units.

It is possible that consumers are already beginning to postpone their car purchases in anticipation of lower car prices post goods and services tax (GST) (as a 6% GST replaces a 10% sales tax) while others are beginning to postpone big-ticket consumer discretionary spending in anticipation of a less favourable environment in 2015.

What is clear is that heightened competition in the market is here to stay. Manufacturers have embarked on a strategy to win and retain market share helped by a robust new model pipeline. New marques are entering the market while existing players are also expanding their model line-ups into new market niches. Margins will likely remain under pressure.

Foreign exchange (forex) volatility will also impact the sector. The US dollar strength will be negative for UMW Holdings Bhd and Tan Chong Motor Holdings Bhd while the Japanese yen’s weakness will benefit Berjaya Auto Bhd, MBM Resources Bhd and DRB-Hicom Bhd.

Unexpected regulatory changes, unfavourable forex trends, availability of financing, unpredictable consumer behaviour and a weakening of consumer confidence are the main risks.

We expect industry sales volumes to dip slightly to 650,000 units in 2015 after experiencing three consecutive years of higher y-o-y sales. The implementation of the GST, combined with rising living costs, will all pressure the consumer.

On the flip side, overall consumption spending should stay resilient, helped by a strong product pipeline and a competitive marketplace where manufacturers are  prepared to discount. These factors should be supportive of auto sales in 2015.

We remain “neutral” on the sector given the absence of rerating catalysts. Our top pick remains Berjaya Auto, the distributor of Mazda cars in Malaysia and the Philippines.

A focused business plan, growth from a small base and compelling product range will enable Mazda cars to gain market share. — RHB Research Institute, Dec 30

This article first appeared in The Edge Financial Daily, on December 31, 2014.