2015 Strategy: Automotive (NEUTRAL) - Ending 2014 with style

Good morning,

2015 Strategy: Automotive (NEUTRAL) - Ending 2014 with style

• Maintain Neutral.  Dec TIV surprised positively, jumping 17% MoM to 64.7k units, driven by strong deliveries across the board following an aggressive year-end sales campaign. TIV surged to a 17-month high of 64.7k units in Dec (+17% MoM, +7% YoY), taking 2014 TIV to 666.5k units (+2% YoY), a new high. This met 101% of our 2014 forecast of 660k units.

Apart from VW, all major marques recorded MoM growth in Dec. MoM growth was led by the Japanese marques with Toyota (+33% MoM) emerging the biggest winner, followed by Honda (+32% MoM) and Nissan (+31% MoM). Meanwhile, VW (-39% MoM) weakened for the 4th consecutive month and sunk to a 4-year low with just 233 units delivered in Dec.

Notably, Honda‘s market share grew 3.8ppts in 2014 while Proton’s market share declined for the 4th consecutive year (-3.8ppts).

• What’s our view? Our 2015 TIV forecast of 660k units is unchanged in view that consumers will adopt a wait-and-see approach as they brace for higher cost of living and uncertainties to car prices (±1-2%; immaterial) from the GST implementation in Apr 2015. While we have previously expected 1H15 TIV growth to contract 3-5% YoY to ~320k against a high base in 1H14 (+6% YoY to 333k units), we have yet to factor in potential replacement demand following damages caused by the recent floods in the Peninsular Malaysia (Kelantan, Terrenganu, Pahang, Perak and Johor) and East Malaysia. These 7 states account for 40% of total ~13m cars on the road.

·         Stock picks. We are selective on our stock picks and prefer auto players with exposure to (i) economical car segments (i.e. A, CUV-segment) which are not overcrowded by intense competition (i.e. B-segment) and (ii) JPY-denominated import costs on relatively lower JPY/MYR forex. As such, we advocate a BUY on MBM and BAuto. MBM is our top pick for its more attractive valuations and exposure to the small-car segment via Perodua. We still like BAuto with upside to our forecasts for its: (i) attractive new launches (i.e. Mazda2, Mazda3 CKD, CX-3) and (ii) Yen exposure.