This article first appeared in The Edge Financial Daily on May 17, 2018
Auto and autoparts sector
Maintain overweight: We recently upgraded the auto and autoparts sector to “overweight” (from “neutral”) as we believe the sector has bottomed out in terms of total industry sales volume (TIV) and earnings. Abolishment of the goods and services tax (GST) and higher minimum wages, pledged by the new Pakatan Harapan (PH) government, should lift household disposal income and consumer spending, reinvigorating the sector. We also recently upgraded Sime Darby, now our top large-cap sector pick and a country top pick. Among small caps, we like Pecca and MBM (upgraded to “buy”), and also initiate coverage on Bermaz Auto with a “buy” call and target price (TP) of RM2.64. We also upgrade UMW one notch to “hold”.
We expect a tepid TIV outlook in 2018 and look for 1% year-on-year (y-o-y) growth to 582,400 units in 2018 estimate (previous TIV estimate: 603,800 units) in anticipation of flattish nine months of 2018 estimate TIV as consumers react to the policy uncertainties, temporarily putting on hold big-ticket-item spending. Once the dust settles, likely by the fourth quarter of 2018, we believe removal of the GST and other encouraging policies will provide impetus for consumers to afford cars in the long run, leading to a revival of auto TIV. This coincides with the fresh replacement cycle due in the first half of 2019 estimate (1H19E), in our view. Our 2019 estimate TIV is at 600,000 units (+3% y-o-y).
The ringgit’s sustained strength versus the US dollar and Japanese yen is positive for the auto sector. A stronger ringgit positively impacts auto margins as most auto players import cars/components in one of these currencies. In our auto universe, names with US dollar exposure include UMW (UMWH MK: RM6.12) and Pecca (PECCA MK: RM1.14; “buy”), while Bermaz Auto (BAUTO MK: RM2.17), APM (APM MK: RM3.58; “hold”) and MBM (MBM MK: RM2.48) have yen exposure.
We think Perodua will continue to lead the local auto arena with a market share of 36% (MBM and UMW each hold a 20% and 38% stake, respectively). Elsewhere, we expect mid-range Japanese cars like Mazda to expand its market share to 3.8% within the non-nationals (2017A: 3.2%), driven by the Mazda CX-5 and new mid-variant Mazda 2. We also believe the luxury marques like BMW and Mercedes will continue to perform with the increasingly affluent consumers “trading up” to more expensive non-national alternatives. We flag Sime Darby (SIME MK: RM2.80) and CCB (CNCB MK: RM2; “hold”) as potential plays on this theme.
After the elections, Affin upgraded the sector to “overweight” as we expect it to fare well for investors in coming quarters due to a pickup in consumer spending, aggressive launches from 2H17, and sustained strength of the ringgit. Thus, we believe the sector’s 2018 estimate price-earnings ratio of 18 times has potential for a rerating. Key downside risks include an economic slowdown, weaker-than-expected TIV, and further tightening of auto financing. — Affin Hwang Capital Research, May 16