This article first appeared in The Edge Financial Daily, on October 22, 2015.

Automotive sector
Maintain neutral: Honda Malaysia Sdn Bhd will increase the prices of Honda vehicles by 2% to 3% effective from January next year due to the weakness of the ringgit against the US dollar which caused a significant increase in the cost of imported parts and components.

Honda Malaysia’s managing director and chief executive officer, Yoichiro Ueno, said the price increase is an inevitable step for the group after weighing all possible options, including its efforts to reduce operational cost and expenses.

However, he pointed out that Honda will reevaluate the pricing structure again when the ringgit appreciates to its previous level.

Note that Honda will make a final decision in December, and will keep monitoring the movement of the ringgit closely before disclosing the final figures and models that will be affected by the price adjustment.

We are not surprised by Honda’s decision to revise its vehicle prices which only adds into the current list of auto players that adopted a similar approach, including UMW Toyota Sdn Bhd, which recently announced a hike in its car prices of between 4% and 16% from 2016.

We expect a potential spiral effect as the bulk of industry players would implement similar hikes as a buffer against rising operational costs.

Note that Nissan had already hinted about raising its car prices in 2016.

On the other hand, we reckon the hike in car prices is a temporary setback, especially for those whose imported parts and components (completely knocked down and completely built units) are largely denominated in US dollars, as the readjustment of the selling price will be implemented gradually when the ringgit starts reversing its declining trend.

We do not rule out the possibility of several industry players facing low sales following the hike in vehicle prices.

However, we do not see a big dent to the sales of foreign marques as they have a loyal base and strong followers for all their models.

As such, we expect only a small chip on Toyota and Honda’s future sales but we expect sales of Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and Proton Holdings Bhd (Proton) to suffer quite glaringly if their car prices are adjusted.

As at August 2015, Honda maintained its strong grip as the top performer for foreign marques in Malaysia with impressive vehicle sales of 58,000 units, raking in a 14% market share.

We believe Honda will be able to achieve its 2015 sales target of 85,000 units lifted by higher demand for its new sport utility vehicle Honda HRV, as well as its Honda City and Honda Jazz. We maintain our neutral call on the sector with MBM Resources Bhd and Berjaya Auto Bhd emerging as our top call. — M&A Securities Research, Oct 21