The sector’s earnings delivery (versus our expectations) saw a deterioration in the recently concluded 2QCY24 reporting season as DRBHCOM and TCHONG recorded quarterly losses, dragged by their respective unfavorable operating environment. We maintain our CY24 forecast of new vehicle sales in Malaysia, also known as total industry volume (TIV), at 740k units (-8%), which is a tad more conservative than the 765k units projected by Malaysia Automotive Association (MAA) as we believe e-invoicing and petrol subsidy rationalisation in 2HCY24 will weigh down on vehicle sales. We believe while it will be business as usual for the affordable segment, fuel subsidy rationalisation will likely hurt the demand for midmarket models, giving rise to a two-speed automotive market locally in CY24. Our sector top pick is MBMR (OP; TP: RM6.30), a good proxy to the affordable and fuel-efficient Perodua brand. It also offers an attractive dividend yield of about 7%.

The sector’s earnings delivery (versus our expectations) saw a deterioration in the recently concluded 2QCY24 results season with 29%, 43% and 29% coming in above, within and below, as opposed to 43% and 57% beating and meeting our forecasts the quarter before.

HLIND (OP; TP: RM13.50) beat our forecast largely due to strong motorcycle sales on credit easing by financiers.

Meanwhile, BAUTO (MP; TP: RM2.45) met our forecast despite plunging 30% YoY as the sales volumes of Mazda and Kia vehicles fell on intense competition from Chinese-made vehicles, and on rising costs of its imported units on MYR’s weakening against the JPY which we already factored into our forecasts. Both HIL (OP; TP: RM1.10) and MBMR continued to ride on Perusahaan Otomobil Kedua Sdn Bhd’s strong sales volume at 169,849 units (+17% YoY). HIL also benefitted from the stronger property earnings on the back of strong take-up for its projects. However, both HIL and MBMR’s weaker 2QFY24 results partially negated their first half growth due to longer closure of auto parts manufacturing plant on extended festive holidays. SIME (OP; TP: RM2.90) was buoyed by strong profits from its industrial and automative segments, coupled with the consolidation of earnings from the newly acquired UMW Holdings Bhd. The heavy price discounting drawback in the automotive market in China has started to see a green shoot of recovery

On the other hand, DRBHCOM’s (MP; TP: RM1.30) core net profit almost halved YoY dragged by its 2QFY24 net losses due to wider sequential quarter losses at its postal segment as well as longer closure of auto parts manufacturing plant on extended festive holidays and higher tax. TCHONG (UP; TP: RM0.60) reported wider losses than our forecast as the sales volume of its bread-and-butter Nissan vehicles continued to fall as competitors flooded the market with new models, and worsened by unfavourable forex movements.

We believe there will be a two-speed automotive market locally in CY24. It will be business as usual for the affordable segment as its target customers, i.e. the B40 group, will be spared the impact of the impending fuel subsidy rationalisation and also could potentially benefit from the introduction of the progressive wage model. The pay rise for most civil servants (top management will receive a 7% rise, while those in professional and executive roles see a rise of 15%) in Dec 2024 will also partially restore their spending power eroded by high inflation.

However, the same cannot be said for the mid-market segment as its target customers, i.e. the M40 group may hold back from buying a new car, or they may down trade to a smaller car or switch to an EV to cut their fuel bills) upon the introduction of fuel subsidy rationalisation. Moreover, the implementation of e-invoicing is set to have a major impact on new car purchases especially on the mid-market segment, given that it will essentially cease the common practice of providing 100% hire purchase financing (under the Hire Purchase Act 1967, customers are required to make a minimum down payment of 10%).

In general, the industry’s earnings visibility is still good, backed by a booking backlog of 170k units as at end-July 2024, unchanged from a month ago. More than half of the backlog is made up of new models, alluding to the appeal of new models to car buyers. This trend is likely to persist throughout CY24 given a strong line-up of new launches.

Vehicle sales will also be supported by new battery electric vehicles (BEVs) that enjoy SST exemption and other EV facilities incentives up until CY25 for CBU and CY27 for CKD. The new registration for BEVs leapt from 274 units in CY21 to over 3,400 units in CY22, 10,159 units in CY23, and 6,617 units for the 1H 2024 (quarterly reporting). We expect more favourable incentive from the government that has set a national target for EVs and hybrid vehicles of 15% of TIV by CY30 and 38% by CY40. Meanwhile, the government will speed up the approval for charging stations. The number of charging stations in operation currently at 3,951 should almost triple to 10,000 by end-CY25.

Our sector top pick is MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of more than 100k units (almost a third of its CY24 target sales of 340k units), (ii) being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia, as well as its 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its attractive dividend yield of about 7%.

Source: Kenanga Research - 19 Sept 2024