FW: Outlook: MY Automotive (POSITIVE) - Revving up the recovery

 

: MY Automotive (POSITIVE) - Revving up the recovery

 

Good morning,

 

We are reiterating our POSITIVE stance on the MY Auto sector today, streamlining our USD/MYR and JPY/MYR forex assumptions and valuation base year to CY19 for stocks under our coverage (except SDB). As a result, we have refreshed TP for most auto stocks within our coverage: BAuto (BUY; TP: MYR3.25), UMWH (BUY; TP: MYR6.65), MBM (BUY; TP: MYR2.96), Pecca (BUY; TP: MYR1.80).

 

MY Automotive (POSITIVE) – Revving up the recovery

• Windfall from a sustained strength in MYR. We take the view that the sector has bottomed, in both TIV and earnings, and is en route to a cyclical recovery. We are thrilled on the possibility that the overall sector would finally see a strong earnings rebound in 2018 (after two years of double-digit contraction), boosted by MYR's sustained strength against USD and JPY in the last three months. We project a 30% YoY jump in cumulative earnings for net USD/JPY importers within our auto universe for 2018. Our Top BUY pick is BAuto.
• 2017: Bottomed out. Uninspiring TIV recovery of just 1.4% YoY in 11M17 amid a low base (2016 TIV: -13% YoY) and further weakness in MYR (USD/MYR: 2017 avg. of 4.30 vs. 2016 avg. of 4.14), resulted in another 24% YoY fall in 2017E cumulative earnings (-42% YoY in 2016) for auto players within our coverage. Within the pie, Perodua remains on top, having defended its top market share with yet another popular mass-market launch, in time for further down-trading by consumers in light of higher cost of living. At the non-national segment, Honda remains undisputed with 6 consecutive years of market share gain (11M17: +3.2ppts YoY), at the expense of Nissan (11M17: -2.2ppts YoY) and Mazda (11M17: -0.6ppts YoY) in 2017.
• 2018: If not now, when? While we are not overly upbeat on TIV growth, projecting just a +3% YoY to 610k units in 2018, we are bullish on auto earnings recovery, premised on MYR's sustained strength against USD and JPY (currently USD1/ MYR4.00 and JPY100/MYR3.54). From the peak in 1Q17, averaging USD1/ MYR4.45 and JPY100/MYR3.91, the MYR has been able to hold its strength in the last three months of 2017, gaining 10% and 6% against USD and JPY respectively. This will translate to much better margins for the net USD and JPY importers in the next three to six months.
• 2018: If not now, when? With improving fundamentals for the sector, our BUY picks, sequenced in order of earnings recovery, are BAuto (growth), MBM & Pecca (Perodua exposure), UMWH (earnings recovery) and TCM (trough PBV valuations).

BAuto is our Top BUY for its stronger growth potential, premised on (i) volume growth from the new CX-5 model and (ii) margin recovery from a stronger MYR against JPY. We are also positive on Perodua as it continues to refresh its model line-up in end-2017 with the introduction of the all-new Myvi. In terms of exposure to Perodua, we believe that MBM is the largest followed by UMWH. Also, Pecca benefits as the sole supplier of leather car seat covers to Perodua.

 

 

 

 

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