• 2Q24 sector results met expectations, with three counters under our coverage posting in-line results, and while one fell below expectations. Despite our upward revision of 2024F TIV to 790k units (from 740k), we still anticipate weaker 2H24 TIV numbers, as sales volume normalisation takes place. Hence, we maintain our NEUTRAL call on the sector, with Bermaz Auto (BAUTO) as our Top Pick.

• Generally, auto sector players’ results met expectations, as Sime Darby (SIME), BAUTO and MBM Resources (MBM) met our forecasts. Meanwhile, Tan Chong Motor (TCM) fell short of estimates. SIME closed FY24 (Jun) with a 14% rise in earnings, mainly contributed by its industrial segment and the consolidation of UMW’s numbers into its bottomline. MBM’s and BAUTO’s results were weaker QoQ – as expected – given lower sales volumes due to a seasonally weak 2Q24. TCM, on the other hand, concluded 1H24 with widening losses, as sales volume continued to drop due to the weak demand for its models.

• Major marques have seen declines in their order backlogs, with Perodua's dropping to 100k from 128k in end-Dec 2023, and Toyota's decreasing to 20k from 28k over the same period. However, we note that the backlog was rather stable QoQ, likely due to lower total production volume during the quarter. Despite Perodua targeting a sales volume of 330k units this year (flattish YoY), its YTD sales volume growth of +17% points towards the national carmaker potentially achieving another record high in sales volume in 2024. Therefore, we revise up our 2024 Perodua sales assumption to 345k units from 330k units.

• What to anticipate ahead? We foresee a stronger 3Q24 TIV QoQ, from a low base in 2Q. YoY, 3Q could be another strong quarter, as July TIV grew by 11% YoY thanks to Proton and Perodua – they posted growth of 14% and 13% YoY during this period. However, this may be dragged by weaker data from the non-national marques, given the intensifying competition as a result of new entrants, ie mainly the China carmakers. While EVs are not spared from the competition with the advent of new models, they remain less popular – mainly due to the pricing, with the CBUs being subject to the MYR100k floor. Unless more affordable CKD models are introduced or the price floor expires by end-2025, EV sales are not likely to have a meaningful impact on TIV.

• Our 2024F TIV is revised to 790k. We reiterate our view that the sector is due for a cyclical downturn with regards to sales volume. Perodua may be an exception, given its affordability and value-for-money offerings. In view of our revised FY24 Perodua sales volume assumptions, we raise our TIV forecast to 790k units from 740k units. Our revised forecast translates to a slight 1% YoY decline in TIV

• We maintain our NEUTRAL sector weighting on the expectation of a weaker TIV, as sales volume normalisation takes place – likely in 2H. Our new assumption anticipates 2H TIV to drop by 8% YoY. Our Top Pick is still BAUTO, due to its attractive valuation and higher-than-sector average dividend yield of c.10%.

• Key downside risks include softer-than-expected orders and deliveries, as well as resurgent supply chain issues. The opposite represents upside risks.

Source: RHB Securities Research - 19 Sept 2024