Review

Two of the companies under our coverage exceeded expectations with their 1Q24 results, while another met estimates. We attribute these commendable outcomes primarily to enhanced supply chain conditions and accelerated deliveries ahead of the Hari Raya festivities in April.

SIME was the only one that registered higher profits compared to last year while MBM’s results were flat. SIME has registered better performance, mainly spurred by improved results in its industrial division and contributions from UMW consolidation. MBM saw decreased margins in the Motor Trading Division. Meanwhile, BAuto registered lower profits compared to last year, dragged down by lower sales volume and changes in sales mix from the domestic operations of its Mazda marque. Overall, the sector’s earnings have increased by 26.6% YoY and 8.7% QoQ.

Outlook

We anticipate automotive companies to adopt more assertive pricing strategies for both current and upcoming products to safeguard their market shares amidst escalating competition. Despite launching new models, facelift versions, and new variants, declining backlog orders will likely result in weaker sales in 2024. Perodua's outstanding bookings have reportedly decreased to approximately 100k units from 128k in March.

For SIME, the industrial division is poised for strong performance, supported by a robust order book in Australia from the mining and construction sectors. However, automotive sales in China are anticipated to remain affected by aggressive price competition, particularly in electric vehicles (EVs), which are experiencing sluggish growth. Management anticipates these price wars to persist, further impacting margins in a saturated market.

We believe that the government is likely to implement fuel rationalisation in stages to prevent excessive burden on citizens. This may affect mid-market car demand, especially among the M40 group, benefiting Perodua and Proton. However, EPF Account 3 withdrawals and anticipated civil servant salary increases could mitigate this impact by boosting household cash flow, thus cushioning the effect of the fuel rationalization policy. Additionally, targeted fuel subsidies may drive demand for affordable EVs, potentially increasing hybrid and EV adoption in Malaysia. Overall, we have revised our 2024 TIV higher by 7.7% to 700k units (- 12.5% YoY).

Recommendation

Maintain Neutral on the Automotive sector with unchanged Sell on BAUTO (TP: RM2.33) and MBMR (TP: RM4.70). Meanwhile, SIME (TP: RM3.27) is still rated as BUY.

Source: TA Research - 5 Jun 2024