Automobile Sector - Initial GST impact NEUTRAL, 21 May 2015

April TIV was weak at 45,187 units, (-23% YoY, -33% MoM) but was not entirely unexpected as sales were brought forward to March 2015, driven by the pre-GST buying rush. On a YoY basis, the fall in TIV was across the board with the exception of Perodua which still managed to churn out a 1% growth. National cars are still leading market share (at 50.3%), driven mainly by Perodua. Proton recorded a devastating 51% YoY drop in April.

On the non-national front, Mazda and Toyota saw the largest drop, registering YoY contraction of 40% and 34% respectively. Nissan TIV was down 14% from an already weak base in 2014. Our checks on the ground suggest there has been some improvement in buying sentiment in the market, though we would not expect a full blown recovery in the immediate months ahead.

2015 is the 5th anniversary of the last major replacement cycle in 2010 and these buyers are likely to return to the market and support underlying TIV, notwithstanding the near-term GST impact. While the replacement cycle has become somewhat clouded by the multi-year record TIV achieved over 2012 – 2014, this has to be taken in context with industry discounting and measures to counter strict financing guidelines introduced since January 2012.

MBM (BUY, FV: RM3.80/share) remains our top sector pick for:- (1) a strong recovery of Perodua TIV and margins riding on relatively weak JPY-MYR levels; (2) a cheap proxy into Perodua’s earnings at implied valuation of just 9x FY15F earnings; and (3) normalising capex coupled with earnings turnaround which can drive a gap-up in dividend payout.

BAuto remains a BUY (FV: RM4.20/share) at this juncture while UMW is a HOLD (FV: RM11.40/share). The potential tie-up between Toyota and Mazda is a potential game changer which can lead to the incorporation of Mazda’s Skyactiv technology into future Toyota models. This could accelerate Toyota model qualification for Malaysia’s EEV program and allow UMW Toyota to benefit from cost advantages derived from EEV incentives – narrowing the competitive gap against Honda and Mazda which are early beneficiaries of the program.

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