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.
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
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.
- 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.
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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