Automobile Sector - Contraction narrows in June NEUTRAL, 29 Jul 2015

June 2015 TIV rose 12% MoM to 57,437 units. TIV was still down by 1.9% in June, but this is a marked improvement versus the 23% and 8% YoY contraction seen in the past 2 months since implementation of the GST in April 2015.

Mazda was the strongest performer (+27% YoY) followed by Honda (+19% YoY) and Nissan (+7% YoY). The key drag came from Proton (-8% YoY) and Toyota (-7% YoY). Perodua registered a mild contraction of 2% YoY.

On YTD basis, TIV is still down 3%, mainly dragged by the April-May weakness. If annualised, YTD TIV accounts for 93% of our 2015 forecast, suggesting possibilities of a downward revision. Key marques (under coverage) that are underperforming are Proton and Toyota, offset by outperformance by Honda (see Exhibit 2). Positively, volume performance by our key stock picks i.e. MBM (Perodua) and BAuto (Mazda) are performing in line with expectations.

MAA revised down its 2015 TIV forecast to 670K units (+0.5% YoY)  from 680K units previously in view of the prevailing weak numbers and expects a challenging outlook in 2H15 given economic uncertainties and a moderation in consumer sentiment.

Positively, production-to-sales ratio improved to 89% in June (slightly below historical average). This, coupled with a weak MYR lowers the risk of excessive discounting in the market. However, this is more of a factor of sales numbers picking up, whereas production rate is still maintained.

We remain NEUTRAL on autos. Our top BUY picks are MBM (BUY, FV: RM3.80/share) and Berjaya Auto (BUY, FV: RM3.30/share). We like MBM 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.

We also like BAuto for: (1) a solid 30% FY16F EPS growth riding on aggressive new model launches; (2) upside potential to our 4% yield (FY16F) backed by 5%-6% FCF yield over FY16F-17F and absence of significant capex; and (3) positioned for acquisitive growth given a solid RM320mil net cash. 

UMW (FV: RM10.70/share) and Tan Chong (FV: RM3.40/share) remain HOLDs as earnings are likely to remain depressed given significant operational exposure to the USD. Tan Chong is trading deeply below book value now (FY15F: 0.66x PBV at current share price), but the stock lacks earnings catalyst in the near-term.