Monday 24 December 2012

AUTOMOTIVE


The  year  2012.  Total  industry  volume  (TIV)  in  2012  has  so  far  turned  out  to  be  better  than expected  despite  being  hit  by  tighter  lending  guidelines,  which  hurt  the  sales  of  national  entry-level  vehicles  such  as  Proton  Saga  and  Perodua’s Viva.  There  were  still  supply  constraints following  the  Thai  floods  late  last  year,  which  led  to Honda’s six-month  plant  shutdown  and hindered assemblers from procuring parts. Furthermore, speculation of  a potential cut in excise duties  in  Budget  2013  also  led  to  sales  (notably,  of  the  national  marques)  hitting  the  brakes. Those expectations did not come to pass as we had anticipated, as any announcement relating to the auto sector would be made separately in the upcoming National Automotive Policy (NAP). Despite  these  concerns  weighing  on  TIV  growth,  the  aggressive  launches  by  the  non-national marques,  especially  by  Toyota  and  Volkswagen,  and  strong  consumer  sentiment  as  well  as aggressive  promotions,  are  likely  to  propel  TIV  to  end  the  full  year  with 2.5%  growth.  This  is in line with our revised forecast (our earlier forecast was for 1% growth) and that of the Malaysian Automotive Association.

What  to  expect  from  the  NAP.  We  do  not  expect  significant  market  liberalisation  from  the upcoming  NAP  other  than  efforts  to  make  Malaysia  a  production  hub  for  Enhanced Environmentally  Friendly  Vehicles  (EEV).  Lately,  the  Malaysian  Automotive  Institute,  the  think tank for Malaysia’s automotive sector, has been stressing that Malaysia’s car ownership costs – which include petrol costs, interest financing, insurance and road tax – are much more affordable than  those  in  Thailand  and  Indonesia.  We  believe  this  is  part  of  its  efforts  to  manage  public expectations  on  the  possibility  that  there may  not  be any  reduction in  excise  duties,  or  that  the scale of the cut would be far less than expected. The price reduction, if implemented, will likely trigger  a  drop  in  resale  value  in  the  second-hand  market  given  the  accelerated  depreciation impact, which could in turn deter buyers from trading in their used vehicles for new ones. In our view,  a  significant  shift  to  a  more  positive  landscape  in  the  industry  would  be  the  End  of  Life Vehicle Policy, which has yet to be implemented on passenger cars. However, we think such a policy is unlikely to be announced in the near term due to the critical sensitivity of the issue.

TIV outlook for 2013. Besides the upcoming NAP, we expect the automotive sector to be quiet next year given the lack of new model launches. We think that  growth will still be driven by the foreign  marques  –  Nissan’s Almera should  still see  encouraging  sales,  the all-new  Toyota  Vios and  Altis  models  are  scheduled  for  launch  in  2H13  while  Volkswagen  may  potentially  roll  out more locally-assembled line-ups next year. These developments could spur competition in the B and  C  segments.  On  the national  carmakers’  side,  Proton  could  be  releasing  a  hatchback version  of  the  Preve  while  Perodua  could  see  new  facelifts  on  the  Alza  and  the  Myvi.    2014 would be a significant year for TIV growth, which will be marked by the potential launches of two new  entry-level  vehicles  in  the  A  segment  from  Perodua  and  Proton.  The  former  could  be  a replacement  for  the  Viva,  while  the  latter  could  be  involved  in  some  joint  development  with Honda, although it would not be entirely surprising if Proton delays this launch again. We expect TIV to grow by 1% in 2013 (to 621k vehicles) given that the market is at saturation, as Malaysia has one of the highest vehicle ownerships in the world.

Downgrade  to  NEUTRAL.  We  believe  investors  would  still  take  a  macro  view  on  the  overall outlook  given  that  2013  is  not  expected  to  be  an  exciting  year  despite  the  impending announcement of the NAP. Hence we are downgrading our sector view to NEUTRAL, with UMW (FV:  RM13.36)  and  Tan  Chong  (FV:  RM5.32)  as  our  top  picks.  The  former  is  a  heavyweight favourite  among  investors  for  its  oil  and  gas  turnaround  while  the  latter  is  a  laggard  performer that may see its Nissan Almera set its earnings on fire.
Source: OSK

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