KUALA LUMPUR (June 9): MIDF Amanah Investment Bank Bhd Research (MIDF Research) has upgraded the Malaysian automotive sector to "positive" with UMW Holdings Bhd and Bermaz Auto Bhd as its top sector picks.

In a note today, MIDF Research said sales tax exemption for passenger cars under the Economy Recovery Plan (Penjana) stimulus package is a strong catalyst for auto demand.

"Under the incentive, the current 10% sales and service tax (SST) will be 100% exempted for completely knocked-down (CKD) models while completely built-up models will enjoy a partial, 50% exemption," it said.

It said this is slightly more than twice longer than the 2018 tax holiday which ran for three months from June 2018 to August 2018.

"The incentive is timely, having seen significant deterioration in car sales following the Covid-19 lockdown measures and its impact on the macro condition.

"The dire need of an incentive similar to the 2018 tax holiday is consistent with our argument back in April, when we turned negative on the sector," it said.

It added that savings from the SST exemption are likely to be fully passed on to consumers.

"Our preliminary checks with selective players over the weekend suggested a range of 2% to 9% reduction in selling prices as a result of the SST exemption.

"As a cross-check however, during the three-month tax holiday period in 2018, car prices were reduced by 5.6% off the prior GST (goods and services tax)-based pricing but the reduction against the indicative SST-based pricing was lower at 2% to 5%," it added.

MIDF Research said given that effective SST chargeable is technically higher for models with lower localisation, the price reductions from the sales tax holiday are expected to be larger in absolute terms for such models, relative to a similar model with a higher local content.

It said non-national CKD models typically entail lower localisation rate of 40%-70% versus up to 95% for the national make, hence it expects the former to enjoy larger price reductions.

In addition, given this positive development, it raises its FY20F total industry volume (TIV) to 554,433 units from 504,580 units previously.

"We now expect FY20F TIV to contract by a much smaller 8.3% year-on-year (y-o-y) compared with the previously expected 16.5% y-o-y contraction," it said.

MIDF Research also said while the next two quarterly result seasons will be weak, this was not entirely unexpected and had already been factored into its previous forecasts.

"However, from 3Q20 (third quarter of 2020) onwards, a strong rebound in TIV and sector earnings is expected, to be driven mainly by the tax-holiday-induced demand improvement," it said.