This article first appeared in The Edge Financial Daily on January 7, 2019

KUALA LUMPUR: After two consecutive years of declining vehicle sales, which is measured in total industry volume (TIV), recovery was expected for 2018 and was to continue on in 2019, albeit at a tepid rate of between 1.5% and 2% for 2019, according to industry experts.

TIV fell 13% year-on-year (y-o-y) in 2016, and 0.6% y-o-y in 2017. It is largely expected to grow 2% to 4% in 2018, thanks to the three-month tax holiday following the zero-rating of the goods and services tax (GST), which boosted numbers.

But the Malaysian Automotive Association (MAA) has kept to its sales forecast of 585,000 vehicles for the year — which is barely 1.5% higher against 2017’s annual sales of 576,635 units.

The final TIV tally for 2018 has yet to be released. But up to November, the TIV tally was up 5% to 550,526 units versus 521,906 units in the same cumulative period in 2017, despite November’s new vehicle sales falling 1.8% to 48,282 units from 49,187 units in November 2017.

MAA expects sales volume for December to be slightly higher than November due to aggressive year-end promotional campaigns.

When contacted, TA Securities analyst Abel Goon said he is expecting TIV for 2019 to come in at 598,000 units, which implies a 1.5% y-o-y growth, mainly driven by new model launches, in particular Proton X70, Perodua’s sport utility vehicles (SUVs) and Toyota’s completely knocked-down (CKD) passenger models.

Goon noted that the completion of Toyota’s new plant in Bukit Raja will result in new variants of Vios, Yaris and Rush being rolled out. The new plant is said will complement Toyota’s current CKD line-up, which is currently lacking SUVs, and the C-segment sedan or the hatchback model.

UMW Holdings Bhd’s 51%-owned UMW Toyota Motor Sdn Bhd has invested about RM2 billion to build the passenger vehicle manufacturing plant in Klang, scheduled to begin operations early this year. The plant is designed for an initial capacity of 50,000 units per year, which can be ramped up to 100,000.

AmInvestment Bank auto analyst Al Zaquan, meanwhile, expects a 2% TIV growth to reach 600,000 units in 2019, with sales being driven by volume-oriented players, namely Perodua, Honda, Toyota, Nissan and Mazda, he said in a strategy report dated Dec 13.

Notably, Al Zaquan predicts that the SUVs segment will lead a sea change in national carmakers as Proton and Perodua are both set to unveil their first SUVs, but with different priorities in mind. Perodua will be focusing on driving sales, while Proton wants to focus on improving consumer perception.

“Proton will rely on the SUV to test various operational reforms and processes that are being introduced to win back consumer confidence. We believe that the X70 [new proton SUV] requires a strong success story in the home market before expanding regionally,” he said.

“Perodua will follow suit and target the more affluent segment where financing options are said to be more secure. Both players are looking to position themselves on the more formidable ground by reducing their dependence on volume over time,” he added.

The projections from both analysts are broadly in line with MAA’s projection, which is around a 2% increase for total car sales to 596,700 vehicles for 2019, from its estimated 585,000 vehicles for 2018.

MAA has also indicated that TIV is expected to grow 2.1% (609,200 units) in 2020, 2.2% (622,650 units) in 2021 and 2.3% (637,000 units) in 2022.

In comparison with MAA’s forecast, Hong Leong Investment Bank Research’s analyst Daniel Wong is less optimistic about TIV's growth in 2019, citing the high base in 2018 and diminishing consumer sentiments over the next one year to affect car sales going forward, as reasons.

“I do not expect any growth for car sales in 2019 compared with 2018, mainly because of the high base this year. A lot of car owners would have bought their cars, especially during the zerorisation of the GST,” Wong told The Edge Financial Daily.

According to the Malaysian Institute of Economic Research, the Consumer Sentiment Index dipped 25.4 percentage points quarter-on-quarter to 107.5 points in the third quarter of 2018 (3Q18), from the 132.9 points recorded at 2Q18.

Meanwhile, the Business Conditions Index fell 7.5 points to 108.8 points in 3Q18, from 116.3 points in 2Q18.

As such, Wong is "neutral" on the local automotive sector, saying it lacks positive catalysts despite the sector’s rather cheap valuations. Wong’s top stock picks are DRB-Hicom Bhd and Bermaz Auto Bhd (BAuto).

“DRB-Hicom is my top pick due to its potential turnaround story from Proton, while BAuto is due to its sustainable earnings growth,” Wong added.

Al Zaquan is similarly "neutral" on the sector. His preferred stocks are BAuto, Pecca Group Bhd, MBM Resources and Tan Chong Motor Holdings Bhd.

“Our ‘buy’ calls are on companies that we believe have a strong foundation to weather the sector’s tepidness and are addressing fundamental issues within their operations, if any were present.

“BAuto has a strong foundation in the domestic sales and exports of the CX-5 and the upcoming CX-8, Pecca is our key beneficiary of Perodua’s dominance here, MBM Resources has seen results from the reform of its alloy wheel unit, while Tan Chong is led by stronger fundamentals and a more realistic strategy for Nissan,” Al Zaquan added.

Goon, on the other hand, remains "overweight" on the sector and selected MBMR Resources Bhd and UMW Holdings as his top pick stocks.

He said MBMR Resources, being the proxy to Perodua, is expected to record strong earnings growth in 2018 and 2019, underpinned by the upcoming launch of the Perodua SUV and strong demand for the third-generation Myvi.

In addition, Goon said MBM Resources’ valuation is one of the cheapest in the sector, as the company is trading at a low forward price-earnings ratio of six times 2019 estimates earnings. The stock closed RM2.31 on Jan 4, which valued the company at RM902.95 million.

Goon also likes UMW for its earnings turnaround story and is of the view that the worst is over for the group following the disposal of Velesto Energy Bhd (previously known as UMW Oil & Gas Corp Bhd). Prior to this, UMW suffered huge losses from its oil and gas assets, with a net loss of RM37.17 million for 2015, RM1.66 billion for 2016 and RM651.19 million for 2017.

UMW net profit stood at RM326.59 million for the cumulative nine months ended Sept 30, 2018, compared to net loss of RM218.5 million a year earlier, while its revenue rose 6.6% to RM8.62 billion from RM8.09 billion.