AUTOMOTIVE (UNDERWEIGHT) Sector Update: Weak Loan Approvals Cause Hard Landing

TIV for the first month of 2012 was a shocker, sinking 25.3% y-o-y and 14.2% m-om due to weak loan approvals and the long public holidays in Jan,  and to some extent, the impact of the Thai floods. The banks’ new lending guidelines effective 1 Jan 2012 led to the rejection of many loan applications for vehicle purchases. As approvals rates in 2HFY11 were  already at a low of 48%, we expect this to have gone even lower to an estimated  30%-40% for Jan, but  retain our TIV growth forecast of 1.1% for 2012 as it  may  be premature to make drastic changes  in estimates for  the first month of a  year.  We  keep our bearish view on autos and continue to advocate taking positions in fundamentally undervalued autopartsstocks with earnings upside potential that may win new contracts as automakers aim for higher localization. EPMB is our only BUY among our auto stocks.

Sharpest contraction since Japan’s  tsunami.  TIV for the first month of 2012 was a stinker, plunging 25.3% y-o-y and 14.2% m-o-m due to weak loan approvals and the long holidays during the month, and to some extent, the aftermath of Thailand’s destructive floods. The passenger segment shrank sharply  by 26% y-o-y, led by passenger cars and 4WDs, which fell 30% and 48% y-o-y respectively. The commercial segment was also not spared, posting a 21% y-o-y decline.

New lending guidelines  keep  buyers away.  Bank Negara’s new lending guidelines effective 1 Jan 2012 and implemented by banks subjecting loan approvals to purchasers’ debt service ratio (capped at circa 60% notably for most civil servants) to total net income as opposed to the previous debt service ratio averaging at 70% of gross income (a higher denominator) resulted in a lot of rejected loan applications from potential vehicle buyers. The new guidelines do not only apply to the hire purchase segment but across the board, including housing loans, credit cards and personal loans. According to Proton dealers, approvals rates back in 2HFY11 were already at a low of 48%, which we estimate may have trended even lower to 30-40% in Jan. 

Policy  U-turn?  The central bank’s aim of promoting financial prudence via the new lending policy is not welcome news in boosting sales of big ticket items, notably housing and vehicle purchases. While the degree of leniency on the denominator (ie gross income) is unlikely to be reversed, banks are still flexible when it comes to the cap on the debt service ratio.

How top 5 marques fared.  The month of January did not go too well for most  auto players. While Perodua continued to retain pole position, sales  were  down 11% y-o-y, although  still far better than Proton, Toyota, Nissan and Honda, which saw sales plunging by 28% / 23% / 28% / 89% y-o-y respectively.  That said,  Perodua numbers may be somewhat misleading since January 2011 came off from a low base given that most potential Myvi buyers held back on their purchases in anticipation of the new Myvi,which was unfortunately delayed when the tsunami hit Japan.

Preview of NAP. A few days ago, the media reported that the Government is considering reopening the 1.8-liter vehicle segment. To put things in perspective, the restrictions on foreigners with 100% ownership setting up manufacturing plants was lifted in the last NAP in 2009, but this was confined to production of vehicles priced above RM150,000. We do not rule out the possibility of the  Government relaxing the price criteria, which may pave the way for the entry of VW in a bigger way and tap into the mass market, as well as other automakers. We understand that currently the Government, together with consultants and industry players, is reviewing key aspects pertaining to the sector in its efforts to drive investment in the manufacture of hybrids and electric vehicles and gradually phase out Approved Permits (AP).  The revised NAP is due to be announced in the next two months.

Maintain UNDERWEIGHT. We retain our TIV growth forecast of 1.1% for 2012 as it would be too premature to make any drastic changes in  estimates in  the first month of the year. We maintain our bearish view on autos and continue to advocate taking positions in fundamentally undervalued autoparts stocks with potential earnings upside which may win new contracts  as car makers aim for  higher localization. For autoparts, we have  a  BUY call on EPMB (FV: RM1.38), which we  feel  will benefit from the rationalization of Proton’s vendors after the takeover by DRB-HICOM (NOT RATED) given the latter’s status as reliable tier-1 suppliers. However, no automakers warrant our BUY call, with UMW (AF: RM6.18) and Tan Chong (FV: RM4.00) remaining as SELLs. We have a NEUTRAL on Proton following its proposed takeover by DRB-HICOM. 

Downgrade MBM and Delloyd. The share prices of most of the autoparts makers under our coverage have rallied strongly since the proposal to take over Proton on speculation that more takeovers will emerge. We are downgrading MBM to a SELL, with our FV unchanged at RM3.69, despite two  contrasting  rumors that the company may be the subject of a takeover by either Proton or UMW, and also a potential rights issue to fund  its acquisition of Hirotako. We are also downgrading Delloyd Ventures to NEUTRAL, with our FV unchanged at RM3.88, given the limited upside to its share price.  EPMB  is our only  BUY  among stocks in  our auto coverage.

Source: OSK188