We are maintaining our Neutral rating on the automotive
sector for 3Q12. Although there was a hiccup in the sector early this year, we
believe that there will be a pent up demand in mid-2H12 where we expect sales
to make a comeback after a prolonged drop last year. This view is further
supported by our affordability study, which concludes that the average
Malaysian household is still able to meet all its debt commitments and hence
car affordability is still intact. In addition, we estimate that there will
still be a long term CAGR growth in demand of 5.7% over the next 5 years from
population growth and the replacement market. We are maintaining our total
industry volume (TIV) sales forecast of 613,674 units (+2.3% growth) with a
rebound seen likely in mid-2H of the year after the expected slowdown in the
1H, driven by pent-up demand and the industry’s still positive long term dynamics
as highlighted above. We are maintaining a Neutral view on the sector for
3Q12.
As for stock picks, we prefer MBM Resources (OUTPERFORM; TP:
RM3.91) given its current low valuation relative to its peers and potential
catalysts from its upstream expansion. In line with our sector Neutral stance,
we are maintaining our MARKET PERFORM calls on UMW (TP: RM7.98) and Tan Chong
(TP: RM4.42).
TIV May sales
rebounded by 22.1% MoM. While there were some initial fears on the tighter
lending guidelines by banks, May TIV sales have rebounded strongly with a rise
of 22% and 27% on a MoM and YoY basis respectively. This appears to support our
view that there will be a pent-up demand in 2H12 given the long term still
strong demand dynamics of the sector. In other words, auto sales should rebound
if it fell too long or too much at any single time (like the falls seen in last
year and earlier this year). This is supported by our affordability study,
which concludes that the average Malaysian household can still meet its current
major debt commitments and purchase a car and a house within its means.
Aggressive new
launches. In addition, we believe that demand can theoretically still grow at
a 5.7% CAGR over the next 5 years, based on its growth rate over the last 11
years from 2000-2011. We did a study on the population growth and local market demand size and suggest that
there is an adequate pool of buyers in the country to meet the long term growth
of the industry above. Based on historical trends, car sales which had fallen
in a particular year due to various reasons actually rebounded very strongly in
subsequent years. This is due to pent-up demand driven by the industry's long
term dynamics of continued affordability and rising pool of demand.
Moreover, we also saw more aggressive
new car launches lately as the carmakers tried to make up for the lost sales
last year. Some of the new models include Proton Preve, Nissan Almera, Honda
City, Prius C, Prius facelift and others that should continue to lend support
to the demand growth. Our total industry
volume (TIV) sales forecast of a rise of 2.3% remained unchanged for the whole
year, with a rebound seen likely in the 2H after an expected slowdown in the
1H.
Sector strategy. The tactical strategy hence is to wait for
the likely rebound in mid-2H of this year. We expect a pent-up demand and this
should lead to a better YoY rebound for auto sales. Going forward, we are
expecting the sector’s average PER to be traded conservatively at around
10x-11x for FY12 based on the targeted
PERs of individual auto companies in our coverage. Against the overall sector’s
net earnings growth (47.9% for FY12 and 28.5% for FY13), the sector’s targeted
PER valuation of 10x-11x above is considered relatively undemanding.
Source: Kenanga
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