Investment Highlights

• Maintain NEUTRAL, demand normalising as expected but cost and FX pressures mounting.
  
  We are NEUTRAL on the sector based on the expectation that TIV will stabilise to historical norms in 2024. The auto sector’s YTD2024 performance has been mixed with an average share price gain of 4.5% together with solid gains by MBM Resources’ (MBMR) 21% and Sime Darby’s (SIME) 18%. Bermaz Auto (AUTO) and DRB-Hicom (DRB) are both flat and Tan Chong Motors (TCM) is down by 16%. Valuations are balanced, except for BAUTO which remains our sole BUY.

• MAA statistics for 1Q24 indicate TIV of +4.4% YoY, our 2024 target of 670k units (-16% YoY) unchanged
  
  The health of car sales remains robust in 1Q2024 with a growth of 4.4% YoY. This is despite the accelerated sales before the expiration of the sales & service tax (SST) exemption end of March last year. Honda and Perodua were the biggest winners in terms of YoY volume growth and market share gains, while Nissan, Proton and Toyota were the biggest losers. While 1Q2024 TIV is better than expected, we believe this stems from clearance of backlog orders from late-2023 and pre- CNY orders; hence, the TIV will taper down in subsequent quarters as demand normalises to historical norms.

• Car loan book growing strongly, quality remains solid
  
  The total loan book for vehicles is at RM410bil (+9.2% YoY) in 1Q2024 which outpaced Malaysia’s system loan growth of 6%. The loan book makes up 19.0% of Malaysia’s total system loan book , a new record. The quality of the car loan book remains solid with a stable gross impaired loans ratio of 0.5% and NPLs are lower than the historical average , which suggests that the industry is not stressed and there is still room for growth.

• FX volatility, both a headache and a source of elation
  
  A weak MYR is generally bad for Malaysian autos as many components and parts are imported mainly from Thailand, Japan and South Korea, and they are typically denominated in USD, KRW or JPY. The auto companies normally hedge their currency positions by buying 3-6 months forward, assuming the swap rates are favourable. BAUTO and MBMR are benefitting from the weakening JPY against MYR, while SIME and TCM are negatively affected by the weakening MYR against the USD and AUD.

• Mixed outlook: New model launches 2Q2024 onwards, volatile FX and impending fuel subsidy rationalisation
  
  There were many new models launched in 1Q2024 with the majority being Chinese-made electric vehicles (EV) and a few conventional internal combustion engines (ICE) models. There will be substantially more new model launches going forward, namely for KIA, Mazda and Peugeot. Some marques are expanding existing models with hybrid options (Toyota and Honda) which have proven to be popular; case in point is the Toyota Cross Hybrid version’s good take-up rate of 40%. The key factor to look up to is the Government’s plans to rationalise the fuel subsidy by June, as the quantum of fuel price increase will greatly influence consumer buying patterns.
   
• Summary of our recommendations:
  
  ➢ BAUTO: Mazda and KIA recorded a 3.4% YoY decline in sales volume for Feb-Mar 2024 (BAUTO’s year-end is April). The lower volume is due to the transition to facelift models as customers naturally wait for the new model launch ahead of purchase commitments. Forward orders have picked up strongly since the launch, and we should see better YoY numbers from April 2024 onwards. We reiterate our BUY rating, earnings forecasts, and fair value of RM3.42/share (based on FY25 P/E of 12x, its historical 5-year mean). No change to our neutral 3-star ESG rating.
  
  ➢ MBMR: Perodua recorded 1Q2024 sales volume growth of 9.3% YoY, but other franchises (VW, Volvo and Hino) sales volume has plunged by 47% YoY. On balance, we forecast MBMR to deliver modest profit growth of 4%-5% YoY in 1Q2024. We reiterate our HOLD rating, earnings forecasts and fair value of RM4.63/share (based on FY24 P/E of 8x, 1SD above its 3-year mean). No change to our neutral 3-star ESG rating.
  
  ➢ SIME: SIME’s Malaysia total vehicle portfolio grew by 2% YoY in 1Q2024. The upcoming 3QFY24 (SIME year-end is June) will be the first quarter with UMW-Toyota consolidation. We reiterate our HOLD rating, earnings forecasts and fair value of RM2.80/share derived from sum-of-parts valuation. No change to our neutral 3-star ESG rating.
  
  ➢ TCM: TCM’s key franchise recorded poor 1Q2024 sales with Nissan and Renault down by 9.8%. TCM will be loss-making in 1Q2024 and FY2024 due to poor sales and cost pressures of imported components that are denominated in USD. We reiterate our HOLD rating, earnings forecasts and fair value of RM0.80/share (based on 0.2x book value). No change to our neutral 3-star ESG rating.

Source: AmInvest Research - 9 May 2024