MY Automotive (NEUTRAL) - Car prices decline, UMW Holdings (UMWH MK; HOLD; TP: MYR10.10): Fairly priced, no re-rating catalysts

Good morning,

Automotive (NEUTRAL) - Car prices decline

• Maintain Neutral.  Post GST implementation yesterday (1 Apr 2015), car prices were adjusted down by 1% on average (mostly national and Japanese marques), in line with our earlier expectation of ±2%. Prices for most Continental marques remain unchanged while a small number of models saw a price increase of up to 0.8% (led by Audi).

For the mass market A & B segments, all major auto players offer a reduction in prices of up to 3.3% (led by Proton) except Toyota which raise its prices for the B-segment slightly (~0.1%). Meanwhile, the luxury car segments (E, F, S-segments) saw a bigger price reduction of up to 5.1%, led by Subaru.

• What’s our view? While this is positive and is expected to boost the rebound in Mar TIV from a seasonal low base in Feb, this is not a major kicker for the sector given that (i) price reduction is insignificant to the total cost of owning a car and (ii) consumer sentiment is weaker in view of higher cost of living post GST implementation. Also, price reductions will be partially offset by GST charges on (i) service and maintenance of the vehicle, (ii) spare part replacements, (iii) general insurance and (iv) petrol (only Ron97).

We remain NEUTRAL on the sector from this new development as the impact from the price reduction will likely to be muted. On the broader picture, we are concerned over auto players with (i) high USD-denominated costs and (ii) substantial old inventories (i.e. unsold 2014 vehicles) which would lead to steep discounts to clear the inventories, leading to erosion in margins. These are detrimental to auto margins and earnings in 1Q15.

• Stock picks. Our Top Pick remains with MBM which will benefit from its 22.6% associate stake in Perodua whose recent success in vehicle sales growth and lower cost of production from higher automation at its new plant will translate to stronger earnings contribution. We still like BAuto with upside to our forecasts for its: (i) attractive new launches, (ii) JPY cost exposure and (iii) presence in the Philippines (2014 TIV: +29% YoY).

UMW Holdings (UMWH MK; HOLD; TP: MYR10.10): Fairly priced, no re-rating catalysts

• What's New? Weak Toyota vehicle sales (2M15: 9.3k units), down 30%-40% from its FY14 monthly average of 8.6k units, is expected to linger in Mar-Apr. The sales underperformance was mainly due to (i) stiff competition especially in the B-segment from new price-competitive launches (i.e. Honda City, Jazz, Mazda2), worsen by (ii) wary consumer sentiment from the GST implementation. As such, we lower our FY15 Toyota sales forecasts by 17% to 75k units vs management’s 100k-unit target, which was recently raised from 93k units after the launch of the new D-segment Camry Hybrid.

Elsewhere, management also painted a cloudy FY15 for the O&G division which is expected to be hit by (i) higher immobilisation period between contracts, (ii) dry-docking expenses for two jack-up rigs and (iii) lower DCRs amid weak oil prices. These led to a 9%/5%/5 cut in our UMWH’s FY15/16/17 earnings forecasts.

• Whats Our View?  Recent developments (i.e. continuous weakening of the MYR, poor Toyota vehicle sales and weaker expectations of 55.2%-owned UMWOG’s FY15 earnings) pose downside risks to consensus 2015 earnings. However, the positive would come from 38%-owned Perodua (2M15 vehicle sales: +25% YoY) which is a beneficiary of (i) a weak JPY due to its JPY-denominated component costs and (ii) down-trading by consumers to more economical cars.

We remain HOLDers of UMWH as valuations are fair at 16.7x FY16 PER, backed by an almost 4% yield (based on 65% DPR).