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This article first appeared in The Edge Financial Daily on February 13, 2020

Auto sector
Maintain neutral:
The Edge Malaysia weekly reported that a number of high-end car dealers are scouting for yard space to store excess vehicles due to weaker-than-expected sales performance following softening economic conditions. The article also highlighted that dealers for Mercedes-Benz and BMW were among the worst hit from the demand slowdown. In addition, the article pointed out further risks to vehicle sales coming from the impending implementation of the new open market value calculation for completely knocked-down models in 2020 as the Malaysian Automotive Association (MAA) had estimated a charge of up to RM33,000 for higher-end models.

We are not overly surprised by the slowdown in the luxury marque segment given that the majority of consumers brought forward their purchases during the tax holiday period in June-August 2018. This is reflected in MAA data, which highlighted that total vehicle sales for Mercedes-Benz and BMW fell by 24% and 23% year-on-year, respectively, in 2019. As a result, the market shares for both luxury marques fell from 2.2% and 2.0% in 2018 to 1.7% and 1.5%, respectively.

Out of the five major dealers for Mercedes-Benz and BMW in Malaysia, three are suffering losses — Cycle & Carriage Bintang Bhd, Hap Seng Consolidated Bhd and Ingress Corp Bhd — while the remaining two dealers are profitable. One of them, Quill Automobiles, a dealer for BMW, is barely breaking even. Thus, only Sime Darby Motors Sdn Bhd remains strong given its unique position. In addition to dealership, Sime Darby has a 49% stake in BMW Malaysia Sdn Bhd, which is a distributor for BMW vehicles in Malaysia, and a 51% stake in Inokom Corp Sdn Bhd, a local contract assembly provider for BMW, Mini, Hyundai and Mazda.

The Malaysian motors division contributed 11% and 16% of Sime Darby’s financial year ended June 30, 2019 revenue and core profit before interest and tax, respectively. The majority of the Malaysian motor earnings come from BMW Malaysia as BMW accounts for more than 70% of the group’s total sales volume. Despite the economic slowdown, we still expect Sime Darby Motors in Malaysia to benefit from the recently launched flagship 320i on Jan 20.

Nevertheless, we are worried about potential supply chain disruptions in China affecting Sime Darby Motors’s division following the Covid-19 outbreak, which has prompted automakers to extend plant closures following the Lunar New Year break. We see downside risks to our earnings forecasts for Sime Darby if the situation does not improve as we have factored in earnings improvement at the China motors division in view of multiple new launches. — CGS-CIMB Research, Feb 10

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