This article first appeared in The Edge Financial Daily on May 10, 2019

Automotive sector
Maintain positive: Bank Negara Malaysia to cut its overnight policy rate (OPR) by 25 basis points (bps) to 3% yesterday. The sector’s total industry volume (TIV) growth historically had an inverse relationship with the OPR. An OPR hike historically had a dampening impact on TIV growth and vice versa if the OPR is cut given improved consumer spending and basically, lower hire purchase rates. As of the first quarter of 2019 (1Q19), the automotive sector registered a year-to-date growth of 6%, driven mainly by new national car sport-utility vehicle (SUV) launches. However, against an inflated base, especially in 3Q18, we forecast a flattish 0.2% TIV growth in 2019.

Despite potentially stronger consumer spending (and potential upside to TIV forecast), auto players’ margins could be negatively impacted by a potentially weaker ringgit due to the OPR cut. Of the players under our coverage, Tan Chong Motor Holdings Bhd is most sensitive to foreign exchange (forex) movements — every 1% change in US dollar-ringgit exchange rate impacts our financial year 2019 (FY19F) forecast by 12%. This is followed by UMW Holdings Bhd (3% change to earnings for every 1% change in US dollar-yen exchange rate) and Bermaz Auto Bhd (BAuto) (1.4% change for every 1% change in yen-ringgit exchange rate). BAuto’s exposure to the yen is mainly via its completely-built-up (CBU) purchases which make up about 30% of Mazda’s TIV. Completely-knocked down (CKD) models are purchased in ringgit from 30%-owned Mazda Malaysia Sdn Bhd, which does absorb the forex volatility. MBM Resources Bhd is least sensitive to forex changes as earnings comprise mainly Perodua vehicles, which entail highly localised models (more than 90% of its sales). Our recent chat with players suggests up to a quarter of forex hedging. Our base case for FY19F forex currently stands at RM4.05 to US$1, and RM3.70 to ¥100.

We maintain our positive view on the automotive sector premised on a national car offensive with new model launches, which plug the gaps in their model mix resulting in structural market share expansion. Besides Proton, Perodua is one of the key proxies to this theme. TIV growth so far this year has largely been driven by Proton (+42.2 %) and Perodua (+9.2%) year to date (YTD).

MBM remains our top pick. We reaffirm “buy” on the counter (TP: RM4.20) as a cheap play into Perodua’s TIV expansion. Key catalysts are (i) strong 6% year-on-year Perodua TIV expansion (FY19F) on the back of the Aruz model to fill up a vacuum in Perodua’s model mix (ii) a recovery in industry production driven by the new national car launches. Risk to our call is weaker-than-expected demand for the Aruz and a weak ringgit.

Also, maintain “buy” on BAuto at unchanged sums-of-parts-derived TP of RM2.85. From a valuation standpoint, BAuto is cheap at just 10.8 times calendar year 2019 forecast (CY19F) earnings while dividend yield of 7% is very attractive. Key catalysts are (1) the launch of the CX8 in October or November 2019 and CX30 in the second half of FY20, (2) dividend outperformance, (3) over 50% increase in FY20F export volume driven by the CX8, (4) potential National Automotive Policy incentives to drive CBU exports, and (5) potential localisation of the CX30. — MIDF Research, May 8