TIV plunged in Jan 2012 on slower business activities in a
month shortened by fewer working days due to the Lunar New Year holidays. While
the tighter lending rules have dampened vehicle sales, its impact should be
manageable as banks and dealers adapt to
the situation. Given that we have
no SELLs in our auto coverage, we upgrade our sector call from UNDERWEIGHT to
NEUTRAL, with UMW as our top pick. We
are still cautious on the macro
picture though, as the demand upside
would be marginal since the replacement cycle for new vehicles -a potential sales driver - has peaked and upcoming models may lack the excitement to spur TIV amid
deteriorating consumer sentiment.
Tighter lending. TIV for the month of January dropped by a
sharp 25% y-o-y. The Proton Dealers Association claimed that loan approval
rates have fallen to 30% against the usual 45%–50% owing to Bank Negara‟s new
lending guidelines. Under the new guidelines, credit approval will now be
determined by calculating the “debt service ratio” based on a purchaser‟s net
income (which is a smaller denominator) instead of gross income previously.
Proper documentation is also needed and any additional income must be backed by
supporting documents, while lending to civil servants will be capped at a debt
service ratio of 60% versus 70%-75% previously.
TIV drop due to fewer
working days. Business activities tend to be slower at the start of the new
year and the fact that the Chinese New Year fell in January aggravated this slowdown.
Furthermore, bonuses are usually not paid so early in the year, and such income
can sway consumers when it comes to the timing in purchasing big ticket items. We
see the drop in TIV as being weighed down more by the shorter work month in combination
with the autoparts shortage sparked off by the Thai floods, rather than due to
a higher rejection rate for car loans per se. To point out, loans applied in
the banking system for the purpose of purchasing passenger vehicles in January
has also dropped by 15% y-o-y to RM6.16bn, while loans approved were down by
15% y-o-y, which has resulted to a drop of 25% y-o-y in vehicle sales for the
month. Furthermore, the ratio of loans approved to loans applied for has
remained at 49.7%, just 2.58ppt higher m-o-m but 1.77ppts lower y-o-y.
Excluding the distortion relating o the Chinese New Year, a more appropriate
measure would be to compare sales in Jan 2012 against that in Feb 2011, during
which vehicle sales were higher by 1.4%
while loans applied for and approved were higher by 17% and 14% respectively
(see Figure 1 below). The higher growth
in loans was, however, overstated given that numbers achieved in February last year
was due to the lower base arising from to the fewer working days.
Banks get cautious
too. In complying with the new
guidelines, banks have become
stricter on documentation and more stringent in initial screening, which
has certainly has put a dent on vehicle sales. On the other hand, this may get
more manageable as banks and car dealers adapt to and familiarize themselves with
the new submission procedure, which has led to the overall loan application
period stretching to a week versus the usual 1-2 days. We understand that the applicants most hit by the new guidelines are civil servants, who are unable to produce
supporting documents on their side income. The more stringent lending rules
may, however, be a boost for financing
companies owned by auto players such as Toyota Capital (owned by UMW, financing
both Perodua and Toyota marques) and TC Capital Resources (owned by Tan Chong,
financing Nissan marques), both of which are not under the direct purview of
Bank Negara. Our latest checks reveal that financing companies backed by
automotive groups were not affected by declining approval rates other than the
slowdown in sales due to the shorter working month. However, the smaller
balance sheet of these financing companies relative to the banks limits their
ability to provide financing for car purchases.
What we expect for
February 2012 TIV. We expect TIV to pick by 20-25% y-o-y and m-o-m in
February as business activities normalize, although YTD TIV will continue to
see single digit negative growth, taking into consideration the possibility
that loan applications may temporarily hit a snag due to the more stringent and
longer loan approval process.
Buyers may defer
purchases pending new model launches. We also reckon Proton sales may slow
down as buyers defer their purchasing decision in anticipation of the new
Persona replacement being launched at end-March. We tested the car last week
and the general feedback among the fund managers and analysts from the trial
drives has been largely positive. We see this
purchase delay similarly
affecting the D and E segments, as well
prior to the launch of the new localized Camry, which will likely be cheaper
than the CBU model by as much as 15%.
Consumers get
cautious. Consumer sentiment remains cautious overall in light of the weak
unemployment outlook amid uncertainty in the overall economy; but we think TIV
could still grow marginally by 1.1% as new model launches could continue to
spur interest. In addition, the replacement cycle for new vehicles that can usually
be counted on to boost sales, has peaked. We expect next year‟s TIV to inch up by a mild 1.1%, based on a
forecast 2012 GDP growth of 5.2%.
What the NAP can offer. The media reported that the
Government is considering reopening the 1.8-liter vehicle segment to
foreigners. The restriction on foreigners with 100% ownership in manufacturing
plants was lifted in the last NAP in 2009, but this was confined to the
production of vehicles priced above RM150,000. We do not rule out the
possibility of the Government further
relaxing the price criteria, which may pave the way for the entry of
other automakers. We also 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 manufacturing
hybrids and electric vehicles and gradually phase out Approved Permits
(AP). The revised NAP is due to be
announced in the next two months.
The Outlook for companies under our coverage is detailed in
the following pages.
- UMW (BUY, FV:
RM7.88). UMW is now our auto sector‟s top pick, on account of the
turnaround of its oil and gas segment on
securing more oil and gas jobs and a
foreseeable better year for its equipment
and manufacturing division. While the auto segment may see modest revenue
growth, we think its margins may improve
tremendously this year driven by a
higher localization rate (for the upcoming Camry), as well as a stronger ringgit. As for Perodua, we see volume
growth fuelled by resilient demand, and
expect the company to grow earnings by double digits for the third consecutive
year at 14% in 2012. This automaker also offers an attractive
potential net dividend yield of 4.4%. We have a FV of
RM7.88 based on SOP (as below), with a BUY call on UMW.
- Tan Chong (NEUTRAL,
FV: RM4.00). With the recently launched all-new Nissan Vanette and the upcoming
B segment CKD sedan (a new segment where Nissan will be competing head-on with Toyota‟s
Vios) slated for launch in September and a number of CBU models in the
pipeline, we see a better 2HFY12. Furthermore, its Danang plant should be
operational as early as March this year, with a monthly production target of
1,200 units, of which some would be exported to China. Nonetheless, the 1H
outlook should remain challenging as demand for its best selling Grand Livina continues
to be lackluster in view of the intensifying competition in the MPV segment.
Given the higher revenue driven by a 18% growth in vehicle volume for FY12
(Malaysia and Vietnam combined), we see Tan Chong‟s earnings growing by 18.4%
y-o-y. We have a FV of RM4.00 premised at 10x FY12 PE.
Maintain NEUTRAL.
- MBM (BUY, FV:
RM5.34). While the recent rights issue raises concerns on a dilution in its
earnings base, we think this will be compensated by the earnings accretion
potential from Hirotako and the interest cost savings it will achieve upon
raising the desired optimized capital. The company‟s longer term prospects
remain reassuring, with the upcoming
alloy wheel plant to generate further revenue and the possibility of MBM cross
selling airbags to Indonesia. MBM is morphing into an established integrated
player with exposure across broad segments and across various supply chains in
the automotive sector. We have a FV of
RM5.34 based on SOP (see table 6 overleaf).
- Proton (NEUTRAL,
FV: RM5.50). We have yet to turn
optimistic on Proton‟s outlook in the immediate term despite DRB‟s
impending takeover as many issues
remain unresolved in turning around
the national automaker and ensuring that it generates decent profits. However,
we do agree that DRB‟s entry as a strategic partner and the possibility of
Volkswagen localizing production would be positive for Proton. Our reservation
rests on how fast DRB can cut costs through its vendor rationalization. We
think such a process will not materialize immediately as one will have to
address the issue of supply chain continuity and renewing its product design.
Our FV at RM5.50 is based on DRB‟s offer price.
- Delloyd Ventures
(NEUTRAL, FV: RM3.88) and EPMB (BUY, FV: RM1.38). We expect autoparts makers
to post better earnings this year on improved volume as assemblers localize more of their production
in Malaysia, thus allowing them to reach bigger economies of scale. There may be potential
sizeable contracts from Volkswagen, which we see setting up an ASEAN production
base in Malaysia while Daihatsu Motor Corp‟s aggressive expansion
into Indonesia may potentially see Malaysian
automakers become its parts sourcing partners. Our valuation on
Delloyd and EPMB is based on 7x and 5x FY12 EPS respectively.
Upgrade sector to
NEUTRAL. As we have no SELLs among our auto coverage currently, we upgrade
our sector call from UNDERWEIGHT to NEUTRAL, with UMW as our top pick. Overall,
we are still cautious on the macro picture for autos as we think the demand
upside would be marginal since: (i) the replacement cycle for new vehicles,
which may boost sales, has peaked, (ii) upcoming models may
not create enough excitement to sufficiently spur TIV growth, (iii) bankers are
tightening lending and becoming more stringent in approving loans, and (iv)
consumer sentiment is deteriorating and buyers have become more cautious.
Source: OSK188
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