Automotive - Marginal growth in 2013

Automotive companies under coverage (ex-UMW) have performed below the house and consensus expectations due to their margin compressions and the lower contribution from their other business divisions. Motor vehicle sales for these companies were actually higher y-o-y, signalling a recovery from the impact of the earthquake and tsunami that hit Japan and the floods in Thailand last year, as well as the stricter lending guidelines introduced early this year. Based on data released by the Malaysian Automotive Association (MAA), the total industry volume (TIV) for 10M2012 of 513,805 units has reached 84% of MAA’s 2012 forecast. Assuming average sales of 51-52k units for November-December, the 2012 TIV should be able to meet MAA’s target of 615,000 units while surpassing our target of 613,674 units. For 2013, we expect the TIV to grow 2.3% to c.627,790 units, supported by new models from Proton, Toyota and Nissan just to name a few. We are maintaining a Neutral view on the sector for 1Q13.  We like UMW (MP, TP: RM12.37) as we expect the group to replicate its strong 3Q12 performance and DRBHCOM (NOT RATED) as we see a high growth potential in its automotive division. We are meanwhile maintaining our MARKET PERFORM ratings on MBMR (TP: RM3.68) and TCHONG (TP: RM4.36).

3QCY2012 results round-up. In 3QCY12, automotive companies under coverage (ex UMW) performed below the house and consensus expectations not due to poor sales but as a result of margin compression and lower contribution from the other business divisions. Motor vehicle sales for companies under our coverage were higher  y-o-y in line with the Malaysian Automotive Association’s (MAA) 9M2012 total industry volume (TIV) sales of 458,447 units (+2% y-o-y), accounting for 75% of its 2012 forecast of 615,000 units. Sales (and production) have recovered from the impact of last year’s natural disasters, which hit Japan and Thailand as well as the responsible lending guidelines imposed early this year. 

2012 TIV should meet MAA’s target. The 10M2012 TIV of 513,805 units has reached 84% of MAA’s 2012 forecast. Assuming an average monthly sales number of 51,300-51,500 units for November and December, the 2012 TIV should be able to meet MAA’s target of 615,000 units, while surpassing our internal target of 613,674 units.

Marginal growth of 2.3% for 2013. We feel that the local automotive market is already saturated and thus expect 2013 to register only a marginal TIV growth of 2.3% to c.627,790 units. The TIV growth will be supported by new models from Proton (Satria Neo R3, Preve Hatchback (P3-22A), Global Small Car (P2-30A)), Toyota (Corolla Altis, Prius C TRD Sportivo) and Honda (2013 Accord), to name a few. Meanwhile,  we expect Nissan to strengthen its share in the local passenger car market (currently  at 5%) through Nissan Almera. We are maintaining a Neutral view on the sector for 1Q13.

National Automotive Policy. In our view, the revised National Automotive Policy (NAP) is likely to be revealed after the general elections with its implementation likely to take place in phases. Among others, the revised NAP may see the gradual removal or reduction of import duties in compliance with trade agreements as well as the introduction of more incentives to auto assemblers and manufacturers to produce more Energy Efficient Vehicles in Malaysia. This would benefit companies like DRBHCOM (Not Rated), a franchise holder for Honda Insight, Civic Hybrid and Jazz Hybrid, and UMW (MP, TP: RM12.37), the franchise holder for Toyota Prius, Prius C and Lexus CT200h.

Stocks recommendation. We like UMW (MP, TP: RM12.37) as we expect the group to replicate its strong 3Q12 performance coupled with the turnaround of its Oil & Gas division and DRBHCOM (Not Rated) as we see a high growth potential in its automotive division from strong sales volume contributed by Proton and Honda, its assembling collaboration with Volkswagen and its future collaboration with Honda Motor. Meanwhile, we are maintaining our MARKET PERFORM ratings on MBMR (TP: RM3.68) and TCHONG (TP: RM4.36).

Source: Kenanga