Auto Sector - A relook at ELV policy? Overweight

- Perodua is urging the government to relook at an end-of-life vehicle (ELV) policy to address vehicle safety and roadworthiness issues, according to a local daily this morning. It is said that in the recent industry players’ discussions with the government, it was proposed that the policy be implemented voluntarily before it is made compulsory. 

- The idea of an ELV policy is not new. In the previous NAP review in late-2009, it was one of the focus areas and the idea was lobbied hard by Proton. However, the implementation of such a policy faces hurdles as the majority of the lower income, rural community were using old cars and this would mean a sudden surge in costs for them to acquire new cars – particularly given very low trade-in value for old cars >10 years old.

- A relook and potential implementation is a positive for the sector as it will encourage new car sales – particularly that of Perodua and Proton, which are the most competitively priced in the market currently. To kick-start such a scheme, we believe there should be incentives to encourage owners to scrap their old vehicles and change to a new one. 

- Such incentive schemes are not new too. In 2009, Proton and Perodua led a pilot “scrapping scheme” project to encourage owners of cars >10 years old to scrap their existing cars. In return, the car owners received a RM5,000 discount (via a fund allocated by the government) to buy new Proton or Perodua models. As a result of such a scheme, Proton sales rose 4% and Perodua sales held up well in 2009 – this has to be taken in the context of a global financial crisis in 2009 and the sector’s 2% sales contraction in the year. 

- Separately, we believe uncertainties over changes in duty policies (in particular, excise duties) may slightly dampen auto sales in the near term. Consumers are likely to hold back purchases in anticipation of cheaper car prices – similar to the situation back in 2006 (sales fell 11% YoY) when the government was in the midst of making a decision to reduce import duties to comply with AFTA requirements (eventually excise duties were raised to compensate for the reduced import duties and car prices hardly changed). 

- Our channel checks suggest that any duty reduction will be gradual to avoid any excessive impact on banks and existing vehicle users (around 5%-10% reduction over several years) and this should cushion any excessive impact on car sales. The corresponding decrease in government income will have to be offset elsewhere, e.g. reduction in fuel subsidies or an increase in sales tax. 

- Our top picks, i.e. MBM (BUY, FV: RM5.40/share) and UMW (BUY, FV: RM12.70/share) are key proxies to Perodua (account for 70% of MBM earnings, >20% of UMW’s), which is a beneficiary of the potential ELV policy implementation. MBM in particular, also rides on Proton sales, as the latter is a key client for Hirotako’s airbag supplies.  

Source: AmeSecurities