Wednesday 19 September 2012

Auto Sector - Aug TIV held up well despite short working month


-  Numbers may hold up well despite shorter working month: August TIV is scheduled to be announced sometime this week. We expect it to be seasonally weak relative to July due to a short working month (Raya holidays in late August), 3-4 days effective plant shutdowns and an exceptionally strong month in July. We estimate August TIV at circa 53K, which represents a 13% MoM contraction and 8% YoY drop. August 2011 TIV was particularly strong due to a temporary recovery from the Japan earthquaketriggered supply shortage. Despite a short working month, Aug  2012 TIV held up well above Jan-Feb 2012 numbers of 40-44K (Chinese New Year celebration) and compares very well against Sept 2011 TIV of 44,407 units (Raya celebrations in 2011). YTD (to August 2012) TIV of 416,315 units is still 2.6% higher than the same period last year.

-  Policy uncertainties may dampen sales: In the near term, uncertainties surrounding sector policies (in particular, duties) will slightly dampen sales as consumers are likely to hold back purchases in anticipation of cheaper car prices.  Our channel checks suggest that any duty reduction will be gradual (circa 5%-10%/annum over several years) and this should cushion any excessive slowdown as there is effectively no way of getting around the reduction in car values, from a consumer standpoint. The corresponding decrease in government income will have to be offset elsewhere, e.g. reduction in fuel subsidy/ sales tax increase.

-  Our numbers already factor in a weaker 2H12: We maintain our numbers at this juncture as we have already factored in a weaker 2H12. Annualised 8M12 estimate of 624,473 units is 3% ahead of our 2012 forecast of 607,625. We estimate an average TIV of 47,827/month for the rest of the year to hit our forecast vs. 52,039/month achieved in 8M12. The launch of Nissan’s Bsegment model, the Almera, should provide a fresh boost to TIV in 4Q12. Management is targeting sales of 1-2K/month and bookings have been opened since early September. Note that sales in the first few months will typically exceed expectations due to initial hype towards the model. 

-  ELV policy if implemented could be a huge positive: Malaysia has a total vehicle population of 22mil as of June 2012, of which 10mil are motor vehicles. Up to 3.2mil are >15 years of age and 4.9mil are >10 years – reflecting the robust pool of vehicles with potential to be scrapped and replaced with new cars. As old car owners will typically opt for lower-priced new cars given low scrap values received for their old cars (typically RM2,000-RM5,000), we believe Perodua and Proton stand to benefit the most from any move to implement ELV. 

-  UMW (BUY, FV: RM12.70) and MBM (BUY, FV: RM5.40) remain our two high conviction sector picks: Key catalysts: (1) Proxies to Perodua (MBM & UMW) and Proton (MBM via Hirotako’s airbag supplies), which are key beneficiaries of potential ELV implementation; (2) A Toyota-specific replacement cycle off a record base of 101,629 units in 2008, underpinned by the new Vios launch next year; (3) Improving O&G earnings prospect with potentially another rig acquisition by end September; (4) An underleveraged balance sheet allows room for potential acquisitions, particularly in the auto sector.

-  Following a steep 8%-15% correction in the past week, MBM is now particularly attractive from a valuation standpoint. We like MBM for its:- (1) Strategic move up the value chain to become a multi-brand vehicle assembly player from a  mere dealership operator currently which should trigger a strong  PE re-rating – closer to incumbents’ 10x-13x CY13F PE from 7.5x currently; (2) Undervalued stake in Perodua – implied 5x FY13F earnings (See Table 4).   

Source: AmeSecurities

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