Automotive - Better Scenery Ahead

We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the outweighing of UNDERPERFORM ratings in the total market capitalisation of our sector stock coverage coupled with the lack of re-rating catalyst. Most automotive companies experienced poor 1QCY16 earnings as sluggish consumer sentiment dragged down unit sales while unfavorable forex exposure compressed profit margins. BJAUTO, however, was able to leverage on the popularity of its flagship models in the domestic and Philippines markets to generate positive earnings growth. MAA sales statistics in May 2016 of 44,669 units (-13% YoY, +6% MoM) showed continued weakness on YoY basis from prevailing weak consumer sentiment as well as stringent lending guidelines. However, we believe the market is seeing signs of recovery from consumers becoming more accustomed to the higher prices. The 5M16 TIV of 218,101 units comprises 35% of our 2016 forecast of 621,000 units. We maintain our current forecast in anticipation of better 2H16 sales from new model launches. BJAUTO (OP; TP: RM2.62) still holds out as our top pick for its: (i) better growth prospect from a low based on the back of strong pipeline of exciting models, (ii) relatively stable margins from lower import duties, and (iii) potential dividend payout of c.70% (c.7.8% div. yield).

Generally disappointing 1QCY16 earnings as most of our coverages, with the exception of BJAUTO, generated poor results below expectations. DRBHCOM, MBMR, TCHONG and UMW were adversely affected by lower sales volume resulting from sluggish consumer sentiment. In addition, unfavourable forex exposure narrowed profit margins of their respective Automotive segment. UMW’s earnings were further aggravated by losses in its Equipment and Oil & Gas segment. Only BJAUTO generated positive earnings growth with better-than-expected sales of its Mazda flagship models, namely Mazda2, Mazda3 and CX-5 in both the domestic and Philippines markets. Post-results, we maintained all ratings for our coverages but upgraded the TP for BJAUTO (OP) to RM2.62 from RM2.41 in lieu of better sales expectations. Meanwhile, we upgraded the TPs for MBMR (MP) to RM2.37 from RM2.30 and UMW (UP) to RM4.95 from RM4.89 as we roll over our valuations to FY17E earnings. Following this, we downgraded the TPs of DRBHCOM (UP) to RM0.76 from RM0.80 and TCHONG (UP) to RM1.76 from 2.15 as we adjusted for lower earnings assumptions.

May 2016 TIV recorded at 44,669 units, continuing the negative YoY growth trend since Jan 2016 (-13% YoY, +6% MoM). Weaker sales continued to persist due to weakness in consumer sentiment, especially for big-ticket discretionary items. More stringent lending guidelines further worsened the situation as lower approval rates deterred new car buyers. However, we believe the impact of GST to consumer sentiment has softened as consumers are becoming more accustomed to the higher price levels for daily expenditures. Our assumption is also backed by the MIER’s Consumer Sentiments Index which recorded 72.9 pts in May 2016 from 63.8 pts in Apr 2016, indicating the first sign of recovery from passive spending over rising prices. On a MoM basis, Proton appears to lead growth numbers at 13%, which we believe is the result of returning interest from lower-income groups as well as a lower sales volume base in April 2016. Toyota and Nissan trailed with 9% growth each, which we believe is likely on similar reasons but from offering affordable B-segment options (i.e. Toyota Vios and Nissan Almera). On a YoY basis, Mazda was the only marque that displayed improvement with 9% YoY growth, likely driven by the rising popularity of its flagship models, the Mazda 2, Mazda 3 and Mazda CX-3. Proton declined the greatest in YoY terms by 39% as the Proton Iriz which was highly popular in May 2015 could have lost interest from buyers.

Counting on new model launches in 2H16 to stimulate the sector. While challenging economic conditions and rising cost of living has been mainly attributed to the weakness of the sector, the lack of new models by the major marques such as Toyota, Proton and Perodua up till now, are also not helping to stimulate buying interest. However, we believe our national marques will see some much-needed boost in unit sales with the recent unveiling of the new Proton Perdana and the upcoming rebadged Suzuki Ertiga MPV by Proton and new Perodua Bezza sedan in 2H16. Other forthcoming model launches such as the new Honda Civic, BRV, facelift City, Jazz and Accord, diesel engine models from Mazda and new Toyota Hilux, Fortuner, Innova and upgraded Vios, are anticipated to attract consumers back into the automotive market. YTD, 5M16 TIV of 218,101 units comprises of 35% of our 2016 forecast of 621,000 units. We maintain our current forecast in anticipation that 2H16 sales will pick up to meet our estimates.

BJAUTO remains our top pick as we view it as a rose among the thorns given its targeted customer base in the middleincome to high-income bracket that are less sensitive to the rising cost of living. More positively, the recent management buyout could also remove the overhang on its shares while a positive knee-jerk reaction could be reflected in the share price in the foreseeable future. All in, we are still optimistic with its investment merits supported by: (i) better growth prospect from low base on the back of strong pipeline of exciting models, (ii) relatively stable margins benefiting from the lower import duties from FTA with Japan, and (iii) potential dividend payout of c.70%, which translate into fair dividend yield of c.7.8%. BJAUTO is currently trading at an undemanding valuation of 11.0x forward PER, which is below industry average forward PER of 20.1x. Risks to our call include (i) adverse forex exposure to the Japanese Yen and (ii) weaker than expected automotive sales.

Source: Kenanga Research - 15 Jul 2016