Monday 24 September 2012

Automotive - Aug '12 TIV: On Slower Gear?


August  TIV  fell  by  11%  y-o-y,  13%  m-o-m  and  2%  YTD.  Excluding  the  distorted impact  arising  from  the  Hari  Raya  period,  TIV  growth  for  July  and  August combined actually rose 1.7% y-o-y. Despite a slowdown in car sales as consumers decided  to  wait  and  see  if  car  prices  would  be  lowered,  sales  so  far  have  been commendable.  We  are  forecasting  a  conservative  1.1%  upside  for  2012  TIV.  We believe any price cuts are likely to be gradual. Efforts to promote Malaysia as an energy efficient hub lack punch to lure investments given the lack of a supportive eco-system.  With  stock  prices  declining  amid  a  jittery  market,  and with  our calls for this sector’s stocks being mostly BUYs, we upgrade our call to OVERWEIGHT from NEUTRAL with top buy being UMW (FV RM11.87).  
 
August numbers distorted by seasonality. 
TIV for the month of August fell 11% y-o-y and 13% m-o-m. Note that the y-o-y growth  was distorted due to  the timing of the Hari Raya  holidays.  When  combined,  July  and  August  TIV  ticked  up  2%,  suggesting  that demand remains encouraging despite the tougher hire purchase lending guidelines.  

How the marques fared. 
For the July-August 2012 period (we analyze on a two-month period to take out the distortive impact), both Perodua and Proton saw a drop in volume. Perodua  sales  slipped  by  3%  y-o-y  as  vehicle  sales  were  hit  by  the  tougher  lending guidelines.  Proton  too  was  also  not  spared  for  the  same  reason,  suffering  a  much steeper  drop  of  16%  y-o-y  as  we  reckon  buyers  may  have  shifted  their  preference  to Perodua.  Non  national  automakers  were  the  clear  winners:  Toyota:  7%  y-o-y,  Nissan: 10%  y-o-y,  Honda:  73%  y-o-y,  Hyundai:  32%  y-o-y,  Volkswagen:  146%  y-o-y,  BMW: 27% y-o-y, and others: 11% y-o-y. Mercedes Benz, however, suffered a decline of 12% y-o-y.   

Forecast intact with upside bias. 
TIV growth YTD remains in positive territory at 1.7%, slightly ahead of our forecast of a 1.1% growth in 2012. Sales for non-national marques in  the  July-August  period  remain  quite  encouraging  despite  talks  on  the  likelihood  of  a
reduction in excise duties, which could be announced in the upcoming Budget 2013 or in the  National  Automotive  Policy.  It  is  also  business  as  usual  in  the  second  hand  car market.  Based  on  our  channel  checks,  any  weakness  in  sales  in  September  and
October  would  be  marginal.  Come  Q4,  we  believe  the  seasonally  slower  quarter  (as many defer purchases to after the new registration year) could be buoyed by new model launches from key models such as Nissan’s entry in the B segment, the Almera, and the all new Honda City. As such, we maintain our TIV growth forecast of 1.1% for now.
What to expect in Budget 2013? We see the Budget 2013, due to be announced on 28 Sep, to be a non event  as  we  believe  any  meaningful  announcement  pertaining  to  the  auto  sector  to  be  unveiled  in  the upcoming National Automotive Policy, for which the date has yet to be determined. What could be reviewed in the  Budget  2013  is  the  follow  up  on  whether  the  100%  tax  exemptions  on  imports  for  hybrid  and  electric vehicles (for 2000cc and below) which is due to be expired end-2013 will be extended.  We believe another round of extension is likely given that Proton’s upcoming hybrid/electric vehicle, which was initially scheduled to be mass produced sometime in 2013, is put on hold following its takeover by DRB-Hicom. An extension of this  hybrid/electric  vehicle  incentive  will  benefit  non  national  names  with  hybrid  vehicles  in  their  stable  e.g Toyota and Honda. Tan Chong, which is currently carrying out trial runs for the Nissan Leaf electric car, would also benefit should the vehicle hits the street.
 
On the previous NAP policy. The last NAP, announced in 2009, has failed to make a meaningful impact in attracting investments  from  foreign  automakers.  This is  largely  due  to  its  protectionist  policies  favouring  the national  automakers  and  its  inconsistencies.  In  the  last  NAP,  the  freeze  on  new  manufacturing  licences  for luxury  passenger  vehicles  with  engine  capacity  of  1,800cc  and  above  was  lifted  and  the  issuance  of  these licences no longer carried  equity conditions. Unfortunately, no new player has entered the market since the policy  was  announced.  Other  notable  announcements  were  on  tax  incentives  and  pioneer  status  for  the development  of  hybrid/electric  vehicles  and  its  required  infrastructure,  which  have  spurred  Honda  to  invest RM350m to localize the assembly of the Honda Jazz Hybrid and also encouraged Tan Chong to set up a new subsidiary called First Energy Networks to build and operate an electric vehicle (EV) charging infrastructure.

What to expect from the upcoming NAP
-  End-of-life vehicle policy: In the last NAP, the government announced a gradual implementation of the end of life vehicle policy, whereby any vehicle above 15 years old will be required to undergo a mandatory inspection prior to its road tax renewal. The inspection is likely to be done by Puspakom, which is a concession owned by DRB-Hicom. We estimate that this represents a pool of 0.5m-0.8m vehicles  of  the  total  10.3m  vehicles  currently  on  the  road.  Unfortunately,  the  policy  had  to  be scrapped as it has sparked public outrage as many of the owners of these aging vehicles would not be able to afford a new vehicle, be it brand new or second hand.   We believe any attempt to introduce a scrapping policy will need to address  the issue of how much government assistance will be involved, noting that owners of these vehicle are mostly from the low income  group.  Assuming  a  conservative  0.5m  vehicle  owners  and  an  incentive  of  RM5k  each  (as was  given  in  the  Mini  Budget  announced  in  2009),  it  will  require  a  total  incentive  of  RM2.5bn.  We think  RM5k  by  itself  will  not entice  those  from  the  low income  group  to  surrender  their vehicles  for scrapping, as we had witnessed back in 2009. Should such policy be implemented, this will be a big positive  mostly  for  the  national  automakers,  Proton  and  Perodua.  A  clear  cut  winner  for  the mandatory check will be DRB’s Puspakom. 

-  Cut in excise duties. Whether excise duties would be cut is a RM8bn question – RM8bn being the amount of tax receipts from excise duties from auto sales last year – but could be worth more to the auto  industry  if  the  same  mistakes  of  the  first  NAP announced  in  2006  were  to  be  repeated.  Back then,  excise  duties  were  slashed,  resulting in  a  4%-11%  for  reduction in  overall  car  prices  for  new vehicles  –  4%  for  most  national  automakers  and  a  range  of  7%-11%  for  completely  built  up  units (CBUs).  In  2006,  TIV  dropped  by  a staggering  11%.  The price  reduction  triggered  a drop in  resale values, and the second hand market was hit hard by the accelerated depreciation impact. This drop in resale value deterred buyers to trade in their used vehicles to buy new ones. Note that the trade-in market accounts for 70% of total TIV sales. The banks, being the hire purchase financiers, will also see  a  reduction  in  collateral  value,  given  that  the  value  of  the  car  depreciates  faster  than  the remaining  loan  obligations. With  25%  of  bankruptcies  caused  by  hire  purchase,  the  biggest  culprit after housing and personal loans, banks would need to readjust their risk exposures, hence resulting in a potential increase in hire purchase rates. After what was experienced back in 2006, even a 5% reduction  in  car  prices  could  have  disastrous  impact  to  the  auto  eco  system.  As  such  we  only foresee a gradual reduction in excise duties to give all parties in the auto industry supply chain time to adjust to the price difference. In addition, any reduction in excise duty will be offset by a gradual removal of the petrol subsidy. Any attempt to cut prices will benefit automakers across the board due to higher sales, but with non-national automakers benefiting more given the pricing gap.
 
-  Lifting licensing freeze on B-segment. The Government is considering reopening the 1.8-liter and below segment. 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 for the 1.8 liter and above with a pricing of least RM150,000.  We  do  not  rule  out  the  possibility  of  the  Government  further  relaxing  the  price  criteria,  currently confined  to  the  1.8  liter  and  above  segment.  This  may  pave  the  way  for  the  entry  of  other automakers.  Such  move  could  not  only  lure  in  new  marques  into  Malaysia,  but  also  encourage existing  marques  under  contract  assemblies  with  local  players  to  establish  their  own  vehicle assembly/production facility with 100% ownership.

-  Energy and efficient vehicle policy. Like Thailand, Malaysia too wants to jump into the bandwagon to  make  the  country  a  regional  or  global  hub  for  the  production  of  energy  efficient  vehicles  (EEV). EEVs  are  vehicles  that  meet  a  set  of  defined  specifications  in  terms  of  emission  level  and  energy usage.  They  include  fuel  efficient  vehicles  on  the  conventional  internal  combustion  engine  (ICE) technologies, hybrid, electric vehicles and alternatively fuelled vehicles such as compressed natural gas (CNG), liquefied petroleum gas (LPG), biodiesel, ethanol, hydrogen and fuel cell.  This  is  a tall  order  in  our view,  as  setting  up  a  global  hub  will  firstly  require  a  big captive domestic market and a supportive eco system, regardless of what incentives are being dangled. And given the protective  landscape  of  Malaysia,  we  reckon  only  liberalization  in  the  sector  and  the  removal  of petrol subsidies  would  entice EEVs  producers  to  establish a  big presence  here.  Thailand,  which  is
dubbed as the Detroit of Asia, has a similar policy introduced back in mid-June 2007, called the Eco Car  Policy.  Under  this  policy,  eco  cars  in  Thailand  must  meet  the  required  fuel  consumption  of  at least 20km/litre to qualify for its incentives offered by the Government, ie eight years corporate tax break and duty free importation of machineries. While the incentives are luring enough, it is actually the  established  eco  system  of  the  entire  supply  chain  that Thailand  has  successfully  attracted  eco
car  producers  such  as  Mitsubishi,  Suzuki,  Honda  and  Nissan.  This  leaves  only  Toyota  which  will likely announce its eco car entry into the market  sometime in 2013. Note that Toyota and Daihatsu has launched its 1.0 liter car called the Agya and Ayla respectively in Indonesia last week. Pricing is attractive,  from  as  low  as  RM24k  and  we  foresee  that  this  could  also  likely  be  the  upcoming  Viva replacement  due  in  2013  or  2014.  While  production  of  eco  cars  in  Thailand  are  now limited  to  the
conventional  internal  combustion  engine,  the  Thai  government  is  already  actively  luring  in  battery makers to establish a hub here. Hence, in conclusion, Malaysia still has a lot of catching up to do to attract EEV makers in a big way.
Could NAP let down again? Although the upcoming NAP will potentially reform the industry landscape, it is clear  cut  that  the  automotive  industry  here  will  not catch  up  with  Thailand or  possibly  even  Indonesia given the latter two countries’ larger captive market and low cost structure. A safe strategy to ride on the upcoming NAP is to stay invested in UMW, the assembler of the Toyota marque, since the fierce competition following the gradual liberalization of the auto sector will benefit trusted and established brand names. Toyota vehicle sales are only likely to see higher demand should an eventual price cut or liberalization materialize.

Upgrade  to  OVERWEIGHT.  With  most  of  our  calls  being  BUYs  following  our  upgrade  on  Tan  Chong  last month as well as the decline in stock prices given the cloudy market outlook, we upgrade our call on the auto sector from NEUTRAL to OUTPERFORM, as well as retain UMW and MBM as our top picks in the larger and mid-cap  space.  The  NAP  aside,  we  see  both  companies  benefiting  from  the  impending  replacement  of  the Viva. We also like Tan Chong as it is a laggard, as well as the firm prospects of the upcoming Nissan Almera, which is due to be launched sometime in November.
Source: OSK

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