KUALA LUMPUR (Jan 11): Hong Leong Investment Bank (HLIB) has maintained its ‘Underweight’ call on the auto sector, on view it would register lower year-on-year (y-o-y) total industry volume (TIV) in 2016, whilst keeping DRB-Hicom Bhd as its top pick (with a ‘Buy’ call) at an unchanged target price (TP) of RM1.35.
 
HLIB forecast 2016 TIV to stand at 572,000 units, 14.2% lower than 2015’s TIV of 666,674 units, due to deteriorating consumer sentiments, weakened further by price hikes by several original equipment manufacturers (OEMs), as well as tightening hire purchase (HP) rules.
 
Its auto analyst Daniel Wong in his report dated Jan 11, noted that consumer confidence index had deteriorated to 73.6 points in 3Q16, after two consecutive quarters of recovery.
 
This signalled a reversal trend of the improving consumer sentiment, amid ongoing uncertainties and higher costs of living, as well as erosion in purchasing power.
 
“Hence, we expect only mild recovery in consumer confidence into 2017, as consumers adapt to the ongoing market impediments,” said Wong.
 
These impediments include the weakening ringgit, higher energy and commodity prices, reduced subsidies, as well as increasing transportation costs.
 
The weakening ringgit against other major currencies — especially the U.S. dollar and Japanese yen — had severely increased OEMs’ input cost structure and affected their margins over the past two years, Wong said.
 
“Mirroring the 2016 situation, we believe any price hike attempt by the OEMs may still backfire and they will eventually resort to aggressive sales marketing strategy in 2017, to boost sales volume and lower overall fix costs, especially on domestic and CKD models production,” he said.
 
“As in the past, sales for Dec 2016 may spike, as consumers buy ahead to take advantage of year-end sales deals. [This year] will be another tough year for the automotive industry,” he said.
 
For 2017, HLIB forecast full-year TIV to improve to 600,000 units, growing 5% y-o-y, driven mainly by new models contribution and recovery of consumer sentiments towards 2H17.
 
Contributing to the expected increase in TIV would be national OEMs, Perodua and Proton, which are likely to gain market share on the back of models launched in 2H16 and 2017.
 
On the flipside, consumers will likely defer big ticket item purchases and stay on with current status (continue using existing car, car-pooling or public transport), in order to limit their financial commitments, Wong said.
 
Furthermore, the commencement of LRT extension and MRT line will improve public transport connectivity and lessen consumers’ inclination to purchase cars for convenience.
 
“Hence, the demand for new cars will likely to remain lackluster at least in 1H of 2017, before a latent improvement towards the end of 2017, as consumers slowly adapt to market apprehension,” Wong said.
 
“Our top pick is DRB-Hicom Bhd on expected improvement in Proton sales volume, [following] new model launches, and the ongoing restructuring of Proton with the emergence of [a] strategic foreign OEM partnership,” Wong said.
 
“We expect its largest contributor, Proton, to improve its financial position in 2017, from full year contribution of Persona, Saga and Ertiqa and potentially a new SUV model in 2017,” he added.