PETALING JAYA: The Malaysian automotive sector’s total industry volume (TIV) is expected to be buoyed by the sales and service tax (SST) exemption, coupled with the gradual reopening of the economy in the second half of the year, according to AmInvestment Bank Research (AmResearch).
Overall, it remains overweight on the sector with an unchanged TIV projection of 575,000 units, which translates into a 9% year-on-year (y-o-y) growth for 2021.
“We expect TIV growth in H2’21 to be supported by a sustained strong performance of national marques ie Proton and Perodua due to their more attractive pricings and value propositions for their products in the domestic auto market,” it said in a report.
The research house expects the auto sector to resume operations – across assembly, manufacturing and showroom activities – in July-August as Malaysia moves into Phase 2 of the National Recovery Plan (NRP) which will allow the sector to operate as usual.
It highlighted that the accelerated inoculation efforts and gradual easing of the movement control order (MCO) by phases will result in a robust consumer spending, which includes big ticket items as sentiment gradually improves.
“The SST exemption – 100% and 50% on locally assembled (CKD) and fully imported (CBU) car models respectively – has been extended until Dec 31, 2021, and we believe that this would continue to spur vehicle sales until the end of the year.”
Post lockdown, AmResearch projected a TIV of 50,000-60,000 a month with a bulk of the market share tilted in favour of national carmakers in the fourth quarter.
It believes the worst is over and there will be a gradual easing of restrictions globally in tandem with the global vaccination efforts which will improve businesses’ cash flows and reduce the disruptions to supply chains.
Domestically, the production of vehicles will be normalised with a gradual easing in the shortage of ships, especially with Perodua’s Myvi. “From our checks, we gather that Perodua is trying to find substitutes to its supply chain via sourcing of different suppliers,” AmResearch said.
The research house believes the sector will still be led by national carmakers as Proton and Perodua’s vehicles are priced attractively with superior value propositions compared to the mid-tier non-national brands such as Toyota, Nissan and Honda.
Aside from that it noted the low financing rate will continue to be supportive for the purchase of vehicles as AmResearch’s projected that the Overnight Policy Rate will be maintained at 1.75% for this year.
Furthermore, the strengthening ringgit against the US dollar will be positive for the auto players under its coverage, as a substantial portion of their cost of goods sold is denominated in US dollar and a stronger ringgit would result in lower operating cost and higher profit margin.
Nonetheless, the research house listed a number of potential risks that could prompt a downgrade of the sector to a neutral/underweight call, namely a rise in new Covid-19 cases which will prolong the lockdown, and heightened global trade tensions that could lead to a sharp decline in the ringgit’s performance against the US dollar, which will compress margins, leading to an increase in car prices to maintain profitability levels.
Aside from that, it opined that a tightening on vehicle financing by banks will also constrain demand for cars.
AmResearch’s top pick for the sector is MBM Resources (fair value of RM4.51 a share) as it is undervalued, trading at 6.5x FY21F EPS, compared with the sector average of 14.7x and DRB-Hicom (fair value RM2.38) as it is expected to benefit from Proton’s sustained strong sales momentum from its SUV.
“On the flipside, we are underweight on Tan Chong Motor as it is fundamentally challenged after losing both its CBU and CKD rights in Vietnam, and Pecca Group due to excessive valuations.”