Automotive - Slow and steady

We are maintaining our NEUTRAL recommendation on the Automotive sector due to the lack of fresh leads for the sector in the near term. We believe that the recent 13% drop MoM in August TIV volume was due to the “wait and see” stance taken by consumer waiting for possible goodies to be announced in the Budget 2013. However, the Budget 2013 has not mentioned any changes and benefits to the automotive sector. We think that the sector is poised with incentives in the upcoming and long-awaited NAP revision. However, with the uncertainties in policy ahead, we believe that the  sector will continue to trade with undemanding valuations. With a seasonally strong demand period at the end of the year coupled with new model launches, this will somewhat cushion the impact of the low approval rate and long lead time for loan approvals in early 2012. Hence, we are maintaining our NEUTRAL rating on the sector. Our top pick is UMW (OP; TP RM: 11.17) to leverage on its strong MyVi and Toyota sales and market share. Its oil and gas division has also made a comeback to support its valuation. 

Tan Chong a laggard in 1H12. Tan Chong Motor’s 1H12 sets of results came in below expectations due to delays in the launching of its new model and slow recovery from the Japan earthquake impact. MBM and UMW’s results were within expectations as the recovery in supply was somewhat offset by the slowdown in sales due to the stricter loan approvals, which drag the approval lead time longer.    

August TIV growth slows down. The YTD August TIV for passenger car segment grew marginally at less than 1%. MoM, the sales for passenger car drop by 11% despite it being a seasonally strong sales period prior to festive season, i.e. Hari Raya. This was likely due to the “wait and see” stance taken by consumers prior to the Budget 2013 announcement. However, we believe that it will be a short-lived phenomenon as sales is expected to pick up pace at the end of the year. UMW and Proton have registered a healthy growth in bookings, i.e. for Preve and Toyota Camry, which should support our FY12 TIV growth forecast of 2.3% (613,674 vehicles). Thus far, the national car segment, Perodua has managed to increase its sales by 10% (YoY) and maintained its first position in terms of market share while Proton’s sales were down by 15%. So far, the sales of non-national cars have seen a slow recovery in sales except for Toyota, which grew by13%. Honda and Nissan sales are still lagging due to the timing difference of new model launches like Nissan B-segment Almera and Honda.   

Demand adapts to the lower loan approval rate environment.  We conclude that the 1.6% growth in the YTD August TIV number as within our 2.3% TIV growth forecast for 2012. Despite the down trending of the loan approval rate for the passenger car segment from 52% in January 2011 to 46% (present), the demand has actually grown by 12% YTD (YoY). This is considered a strong recovery for the sector and we believe that the demand is hardly change from stricter financing.     

UMW (OP; TP RM: 11.17) as the sector’s Top pick. In line with the increased sales in Perodua and Toyota, UMW’s 2Q12 earnings have marked a strong recovery and we expect the momentum to continue, supported by its new models like Prius, Camry and Vios new facelift. Its oil and gas division is also slowly contributing to the bottom line as compared to its loss-making position in the past. The main highlights here are the improving earnings contribution from NAGA 3 jack up rig and also the contribution from the agency fees earned from HAKURYU-5 submersible rig. Nonetheless, its automotive division still remained as the major earnings contributor for UMW and going forward, with its recovery set in place, we expect value to emerge from its currently undemanding valuation at 14x.

MBM could emerged as a dark horse…We do not discount that could be something are brewing in the company itself as the management is seriously looking to utilize its manufacturing license in the near term. This will be a big turnaround for MBM, although we would like to wait for more visibilities from the upcoming revisions on the NAP. That said, given the right circumstances, we see MBM could emerge as the “favorite” play of the sector.  

Source: Kenanga