Automotive sector
Maintain “neutral”: Perodua Axia and Proton Iriz were launched with strong preliminary bookings of 13,500 (latest bookings are 32,000) and 17,000 respectively. The Axia (priced between RM26,000 and RM42,000) is positioned with high fuel efficiency, while the Iriz (priced between RM42,000 and RM63,000) with high safety features. We expect strong sales of these cars, driving total industry volume (TIV) in the fourth quarter of 2014 (4Q14) and in 2015.
With the goods and services tax (GST) implementation on April 1, 2015, there could be reduction in car prices (ranging from 0% to 3% dependent on the car model), but consumers may be affected by a higher cost of living. Hence, the pricing of cars (affordability: down payments and monthly repayments) will be an important determinant of consumer choices. We believe both Axia and Iriz are best positioned within the sweet spot of the market.
We expect original equipment manufacturers (especially foreign players) to remain aggressive and competitive in 4Q14 and 2015, which may continue to affect their margins.
Based on historical fuel hike measures in 2010 and 2013, there were no material impact on TIV.
Moreover, the higher 1Malaysia People’s Aid or BR1M payout will ease the burden of consumers (especially low-income group). Hence, we expect TIV to grow in 2014-2015, driven by smaller, value and more efficient cars, for example the Axia and Iriz.
The recent 25-basis-point hike in overnight policy rate (OPR) is not expected to have a material impact on TIV. Take note that TIV continued to grow despite OPR hikes in 2010 to 2011 as well as the implementation of responsible lending guidelines since early-2012. Nevertheless, we do not expect an OPR hike in the near term.
The downtrading trend remained intact, driven by affordability, practicality and tighter bank guidelines. Best to play on A- to B-segment cars.
Recent movement of the ringgit (weakened against US dollar; strengthened against the yen, euro and British pound) will be beneficial to MBM Resources Bhd and DRB-Hicom Bhd, neutral to UMW Corp Bhd and negative to Tan Chong Motors.
Key risks include prolonged tightening of banks’ hire-purchase rules, slowdown in the Malaysian economy, global automotive supply chain disruption and sudden jump in fuel prices and interest rates.
Maintain the sector as “neutral” with top stock picks of MBM Resources with target price (TP) of RM4 and DRB with TP of RM3. — HLIB Research, Oct 15
This article first appeared in The Edge Financial Daily, on October 16, 2014.