Malaysia Sector Update
17 December 2019 Consumer Cyclical | Auto & Autoparts Auto & Autoparts Neutral (Maintained) Navigating The Soft Environment Stocks Covered 6 Ratings (Buy/Neutral/Sell): 4 / 2 / 0 Last 12m Earnings Neutral
Revision Trend: Stay NEUTRAL. Our 2020 TIV forecast of 595,000 units implies a negative Top Pick Target growth of 1%, predicated on expectations of an economic slowdown next DRB-HICOM (DRB MK) – BUY MYR3.price25 year. The consumer trend of shifting towards value-for-money goods should
continue into 2020, and an OPR cut – if any – should have minimal impact to auto sales. The new NAP has now been pushed to early 2020 and, any Analyst adverse changes to the current duties structure, should be sector negative. Top Pick: DRB-HICOM (DRB). Muhammad Afif Bin Zulkaplly +603 9280 8883 Results wrap. September quarter’s performance was below expectations, [email protected]
with three firms missing, two meeting, and one beating our earnings estimates. DRB’s net profits were dragged down by POS Malaysia’s (POSM MK, NEUTRAL, TP: MYR1.40) widening losses. UMW’s automotive and equipment divisions underperformed, while Bermaz Auto (Bermaz) hit a speedbump when the Finance Ministry’s pricing approvals for the new facelifted Mazda CX-5 and CX-8 were delayed. Sime Darby beat expectations, thanks to the outperformance of its industrial (Australia and Sales performance of the major marques China) and auto (China) units. Units ('000) 2020 outlook. We are expecting industry sales volumes to contract slightly in 2020 – forecasting TIV of 595,000 units (-1% YoY vs 2019F’s 600,000 units) 20 – predicated on a softer macroeconomic outlook. Consumer confidence for 15 big ticket purchases remains fragile. Consequently, markets are seeing the
shift, especially in the mass market segment, towards better value-for-money 10 offerings, ie Perodua and Proton – this benefits DRB, MBM Resources (MBM), and UMW. Marques that have a steady stream of new models and 5 variants should have the advantage in attracting and retaining consumer interest, thereby standing a better chance of generating superior margins. 0 Proton Perodua Toyota Nissan Honda Mazda Others
A slew of new model launches in 2020 are on the cards, with Honda Oct-18 Sep-19 Oct-19
refreshing its sedan line-up over the next 12 months: Civic facelift, and all- new City and Accord. Some other notable new model launches include Proton Source: Malaysian Automotive Association (MAA), RHB
X50, Perodua Kembara, Nissan Almera and Volvo V60, as well as the locally- National vs non-national market share assembled Toyota C-HR and Proton X70 variants. The impact of an overnight policy rate (OPR) cut by Bank Negara Malaysia Units ('000) 45 (BNM), if any, is unlikely to be significant in influencing auto sales, in our view. 40 From a consumer’s perspective, the resulting reduced monthly repayments 35 will be minimal (Figure 7). 30 25 20 Key downside risks for the sector are a weakening MYR and significant 15 deterioration in consumer spending patterns. Any adverse changes to the 10 current duties structure from the upcoming revision of the new National 5 0
Automotive Policy (NAP) will be negative for the sector, in our view.
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Jan-17 Jan-18 We maintain our sector call. In the longer term, the domestic auto market Jan-19 National Non-national will continue to be capped by structural impediments of high car prices, improvements in public transport infrastructure, and the advent of ride-hailing Source: MAA, RHB apps, which has given consumers new transportation options. We also believe the weak MYR will continue to pressure auto firms’ margins. Top Pick: DRB – on the further expansion of Proton’s market share and its tapping into regional markets to drive group earnings.
TP % Upside P/E (x) P/B (x) Yield (%) Company Rating (MYR) (Downside) FY20F FY20F FY20F Bermaz Auto^ Buy 2.70 29.2 10.2 3.3 7.4 DRB-HICOM Buy 3.25 40.7 20.6 0.6 0.4 MBM Resources Buy 4.95 28.6 7.0 0.8 5.0 Tan Chong Motor Buy 1.58 20.6 8.7 0.3 1.5 UMW Neutral 4.45 0.0 13.0 1.0 2.2 Sime Darby Neutral 2.45 6.5 15.1 1.0 4.3 Note: ^FY20 valuations refer to those of FY21 Source: Company data, RHB;
See important disclosures at the end of this report 1 Market Dateline / PP 19489/05/2019 (035080)
Malaysia Sector Update
17 December 2019 Consumer Cyclical | Auto & Autoparts
Figure 1: Auto stocks' valuations FYE Price Target Mkt Cap P/E (x) EPS Growth (%) P/BV(x) P/CF(x) ROE (%) DY (%) Rec (MYR/s) (MYR/s) (MYRm) FY20F FY21F FY20F FY21F FY20F FY20F FY20F FY20F DRB-HICOM Dec 2.31 3.25 4,446 20.6 17.4 51.5 18.6 0.6 3.2 3.1 0.4 Buy Bermaz Auto^ Apr 2.09 2.70 2,440 10.2 9.7 16.4 5.6 3.3 12.5 38.0 7.4 Buy MBM Resources Dec 3.85 4.95 1,501 7.0 6.9 1.9 1.7 0.8 19.5 12.1 5.0 Buy Tan Chong Dec 1.31 1.58 855 8.7 8.1 18.8 6.9 0.3 6.3 3.3 1.5 Buy Sime Darby Jun 2.30 2.45 16,119 15.1 14.5 9.2 3.7 1.0 8.0 7.0 4.3 Neutral UMW Dec 4.45 4.45 5,222 13.0 12.4 13.5 4.7 1.0 13.9 9.7 2.2 Neutral Sector Avg 13.6 12.9 13.5 5.5 Note: ^FY20-21 valuations refer to those of FY21-22 Source: Bloomberg, RHB
Results wrap Overall, the 3Q19 results were below expectations. Three of the auto companies we cover missed expectations: UMW, DRB, and Bermaz. The results of two firms were in line: Tan Chong Motor (TCM) and MBM. One beat projections: Sime Darby. UMW’s earnings were dragged down by its automotive and equipment divisions. DRB’s negative variance was mainly attributed to higher-than-expected POS Malaysia losses. Meanwhile, Bermaz’s earnings were dragged by lower sales volumes – this was due to a delay in the approvals by the Finance Ministry on the new pricing for the facelifted Mazda CX-5 and CX-8. TCM recognised higher depreciation charges and interest costs during the quarter, as it adjusted to Malaysian Financial Reporting Standard (MFRS) 16. MBM continues to ride on strong associate contributions growth from Perodua. Sime Darby beat expectations thanks to stronger-than-expected Australian and China industrial division earnings, as well as wider margins from its China auto business.
Auto industry outlook The Malaysian Automotive Association (MAA) reported October TIV of 53,870 units (+14% YoY, +20.6% MoM), as consumers resumed buying after holding back last month in anticipation of the Budget 2020 announcement. Cumulatively, 10M19 TIV reached 496,861 units (-1.1% YoY) – on track to meet our 2019 forecast of 600,000 units. Proton and Perodua have bucked the weaker broad market trends. Most non-national marques recorded lower YTD sales volumes due to the high base from the tax-free window in 2018 – the notable exception is Volvo, which has been gaining traction. Seasonal factors are expected to kick in, with sales spiking upwards in November and December, as distributors gear up for year-end promotions to clear stock and push to meet sales targets. Market share gains by the national marques – Proton and Perodua – are likely to continue into 2020, as consumers – especially in the mass market segment – become more price sensitive. Proton’s revival has been made possible by a refresh of its model offerings and, in particular, the introduction of the X70 SUV following its tie-up with Geely. DRB, MBM, and UMW have been the beneficiaries. A slew of new model launches are on the cards in 2020, with Honda refreshing its sedan line-up over the next 12 months with the Civic facelift, and all-new City and Accord. Some other notable new model launches include Proton X50, Perodua Kembara, Nissan Almera, and Volvo V60. Locally assembled variants of Toyota C-HR and Proton X70 are also expected. The global shift towards SUVs has resulted in a doubling of the segment’s market share during the past decade – Malaysia has been no exception. YTD-10M19, the domestic 4- wheel drive/SUV market share has grown to 22.5% vs a mere 3.4% in 2012 (Figure 2). This has been at the expense of conventional saloons and MPVs. For carmakers, having mass-market SUV offerings are essential to capitalise on this shift in consumer preference. Some of the game-changing SUV models include Mazda CX-5, Proton X70, Honda CR-V, and Perodua Aruz. This, in turn, has benefited Bermaz, DRB, MBM, and UMW.
See important disclosures at the end of this report 2 Market Dateline / PP 19489/05/2019 (035080)
Malaysia Sector Update
17 December 2019 Consumer Cyclical | Auto & Autoparts
UMW’s UMW Toyota Motor unit is the notable exception, with its local line-up glaringly missing a mass market SUV offering for the last decade. This lapse in its product strategy has been a factor in contributing to the loss of Toyota’s non-national champion crown. This lapse is all the more ironic, given the presence of a C-segment SUV – the RAV4 – in the Japanese carmaker’s products portfolio in other regions outside ASEAN. We believe UMW Toyota Motor is attempting to address this gap by introducing the locally-assembled C-HR in 2020, although there is no news yet if the RAV4 – or its equivalent – will be introduced here.
Figure 2: Malaysia passenger vehicle trends Figure 3: Toyota’s Malaysia market share
100% 18.0% 17.0% 90%
16.0% 15.6% 80% 3.4% 4.2% 5.3% 10.1% 12.6% 12.2% 13.7% 22.5%
70% 14.1% 14.4% 14.0% 60% 12.2% 50% 12.0% 11.2% 11.1% 11.0% 40% 77.4% 78.4% 77.7% 76.7% 75.6% 72.9% 73.8% 68.6%
10.0% 30%
20% 8.0% 10%
0% 6.0% 2012 2013 2014 2015 2016 2017 2018 YTD 2019 2012 2013 2014 2015 2016 2017 2018 YTD 2019 Passenger Cars 4WD/SUV MPV Window Van
Source: MAA, RHB Source: MAA, RHB
Figure 4: Total industry volume trend (Units) 2010 2011 2012 2013 2014 2015 2016 2017 2018 10M19 Proton 157,274 158,657 141,032 138,753 115,783 102,174 72,290 70,992 64,744 79,423 Perodua 188,641 179,989 189,137 196,071 195,579 213,307 207,110 204,887 227,243 201,562 Toyota (including Lexus) 91,990 88,662 106,641 92,521 103,636 95,861 65,110 70,445 66,562 54,755 Nissan 34,914 32,408 36,361 53,200 46,609 47,709 41,305 27,746 29,619 18,431 Honda 44,483 32,480 34,950 51,544 77,495 94,902 91,830 109,511 102,282 71,489 Mazda 4,325 6,028 6,332 9,197 11,382 14,325 12,493 9,730 16,038 9,947 Kia/Naza 10,330 11,088 12,327 10,418 9,938 4,676 4,370 4,131 5,658 3,015 Hyundai/Inokom 10,504 11,806 11,938 12,217 10,271 6,286 5,100 4,110 2,949 1,949 Others 62,695 78,960 88,922 91,862 95,772 79,843 80,516 75,083 83,554 56,290 TIV 605,156 600,078 627,640 655,783 666,465 666,598 580,124 576,635 598,649 496,861 Passenger 543,594 535,136 552,189 576,655 588,341 591,092 514,545 514,685 533,130 453,107 Commercial 61,562 64,942 75,564 79,128 78,124 75,506 65,579 61,950 65,519 43,754 Source: MAA
OPR cut: minimal impact to auto sales The impact of an OPR cut by BNM, if any, is unlikely to be significant in influencing auto sales, in our view. From a consumer’s perspective, the resulting reduced monthly repayments will be minimal. Figure 7 is a scenario analysis on changes to monthly instalments, with a base-case loan value of MYR100,000 and default interest rate of 2.3% (flat), with the scenario of financing costs dropping to 2.1%. However, we do note that OPR changes are quoted based on the effective interest rate, and not the flat rate. A 10bps change in the flat rate is equivalent to c.25bps, c.15bps, and c.10bps changes for the 9-, 7-, and 5-year loans in the effective interest rate, assuming financiers pass all savings to consumers. Figure 7: Hire purchase repayments – interest rate sensitivity on a loan value of MYR100,000 Monthly repayment Monthly repayment @ @ Change in monthly repayment Repayment period 2.30% 2.10% (MYR) (MYR) (MYR) (%) 7-years 1,382.1 1,365.5 16.7 1.2 Source: RHB
See important disclosures at the end of this report 3 Market Dateline / PP 19489/05/2019 (035080)
Malaysia Sector Update
17 December 2019 Consumer Cyclical | Auto & Autoparts
Creative financing to improve affordability To improve the affordability of its products, carmakers are becoming more innovative by introducing some creative financing solutions for customers. UMW Toyota Motor – through Toyota Capital Services – now offers two types of step-up financing products for Toyota buyers: EZ Beli and 2-Tier Plan. These plans divide instalment payments into multiple tiers – for instance, in the former, customers can enjoy a lower monthly instalment during the first tier (Years 1-3) before payments step up progressively in tiers-2 (Years 4-6) and -3 (Years 7-9) (Figure 4). These tiers are designed with the assumption that buyers’ incomes increase over time – thereby rationalising their ability to afford the step-up in monthly repayments. In both plans, customers have the option of trading in for a new car at the end of Year 6 to maintain a low monthly commitment. Creative financing is not unique to Toyota. Many other marques like Nissan (staggered hire purchase), Renault (subscription), BMW (balloon financing), Mercedes (agility financing), and Volvo (balloon financing with guaranteed future value price) also offer similar plans – some of which are more akin to leasing. Creative financing offers flexibility to consumers, offering alternative financing solutions other than plain vanilla hire purchase financing – this could sway consumer choices. Figure 8: Toyota’s 2-Tier Plan vs conventional hire purchase Figure 9: Toyota EZ Beli plan for Vios 1.5G (AT)
Source: Toyota Capital Services Source: Toyota Capital Services
Figure 10: Type of financing plans offered by UMW Toyota Motor 2-Tier Type of plan Conventional fixed rate Toyota FlexiPlan EZ Beli Plan Loan value (MYR)* 78,500 78,500 78,500 78,500 Tier 1 894 939 739 665 Monthly instalment (MYR) Tier 2 894 939 739 1004 Tier 3 894 939 1460 1344 Flat rate (% pa) 2.56 3.24 3.15 4.30 Effective interest rate (% pa) 4.74 5.90** 5.75 7.66 Note: *Assuming buying a Toyota Vios 1.5G (AT) Note 2: **BLR 6.75% - 0.85% pa Source: Toyota Capital Services, RHB
Key risks Key downside risks for the sector are a weakening MYR and significant deterioration in consumer spending patterns. While we do not expect any material policy changes from the upcoming revision of the new NAP, any adverse changes to the current duties structure should be negative for the sector.
See important disclosures at the end of this report 4 Market Dateline / PP 19489/05/2019 (035080)
Malaysia Sector Update
17 December 2019 Consumer Cyclical | Auto & Autoparts
Market is soft, consumers are increasingly price sensitive We are expecting industry sales volume to contract slightly in 2020 – forecasting TIV of 595,000 units (-1% YoY vs. 2019F 600,000 units) – predicated on a softer macroeconomic outlook. Consumer confidence for big ticket purchases remains fragile. As a result, the market is seeing a shift – especially in the mass market segment – towards better value-for- money offerings. Coupled with strategic new model introductions, both Proton’s and Perodua’s market share has grown to 16% and 40.6% YTD-10M19. By comparison, it stood at 10.8% and 38% in 2018. We expect this trend to continue in 2020. Marques that have a steady stream of new models and variants should have the advantage in attracting and retaining consumer interest, thereby standing a better chance of generating superior margins. As products age, distributors typically need to offer more discounts to maintain consumer interest. In the longer term, the domestic auto market should continue to be capped by structural impediments. High car prices relative to incomes should continue to limit the size of the market. The ongoing improvements to the public transport infrastructure in the Klang Valley and advent of ride-hailing apps have also given consumers alternative transportation options vis-à-vis motor vehicle ownership. The weak MYR will continue to pressure auto firms’ margins. Additionally, Malaysia has been losing out to neighbouring countries like Indonesia and Thailand in terms of foreign direct investment by the big foreign carmakers, mainly due to unclear investment incentives and a lack of a competitive edge. We maintain NEUTRAL on the sector. Our Top Pick is DRB. A further expansion of Proton’s market share, and its tapping into regional markets, should drive the group’s earnings going forward.
See important disclosures at the end of this report 5 Market Dateline / PP 19489/05/2019 (035080)
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Affiliation between 2 companies which are controlled, directly or indirectly, by the institutional investors, nor shall be deemed as solicitation by RHB in any manner. RHB same party; or is not registered as a broker-dealer in the United States and does not offer brokerage 6. Affiliation between the Company and the main Shareholders. services to U.S. persons. Any order for the purchase or sale of the securities discussed herein that are listed on Bursa Malaysia Securities Berhad must be placed PT RHB Sekuritas Indonesia is not an insider as defined in the Capital Market Law and with and through Auerbach Grayson (“AG”). Any order for the purchase or sale of all the information contained in this report is not considered as insider information other securities discussed herein must be placed with and through such other prohibited by law. Insider means: registered U.S. broker-dealer as appointed by RHB from time to time as required by a. a commissioner, director or employee of an Issuer or Public Company; the Exchange Act Rule 15a-6. This report is confidential and not intended for b. a substantial shareholder of an Issuer or Public Company; distribution to, or use by, persons other than the recipient and its employees, agents c. an individual, who because of his position or profession, or because of a and advisors, as applicable. Additionally, where research is distributed via Electronic business relationship with an Issuer or Public Company, has access to inside Service Provider, the analysts whose names appear in this report are not registered or information; and qualified as research analysts in the United States and are not associated persons of d. an individual who within the last six months was a Person defined in letters a, b Auerbach Grayson AG or such other registered U.S. broker-dealer as appointed by or c, above. RHB from time to time and therefore may not be subject to any applicable restrictions under Financial Industry Regulatory Authority (“FINRA”) rules on communications with Singapore a subject company, public appearances and personal trading. Investing in any non- Save as disclosed in the following link (RHB Research conflict disclosures – Dec 2019) U.S. securities or related financial instruments discussed in this research report may and to the best of our knowledge, RHB Securities Singapore Pte Ltd hereby declares present certain risks. The securities of non-U.S. issuers may not be registered with, or that: be subject to the regulations of, the U.S. Securities and Exchange Commission. 1. RHB Securities Singapore Pte Ltd, its subsidiaries and/or associated companies Information on non-U.S. securities or related financial instruments may be limited. do not make a market in any issuer covered in this report. Foreign companies may not be subject to audit and reporting standards and regulatory 2. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated requirements comparable to those in the United States. The financial instruments companies and its analysts do not have a financial interest (including a discussed in this report may not be suitable for all investors. Transactions in foreign shareholding of 1% or more) in the issuer covered in this report. markets may be subject to regulations that differ from or offer less protection than those 3. RHB Securities, its staff or connected persons do not serve on the board or in the United States. trustee positions of the issuer covered in this report. 4. RHB Securities Singapore Pte Ltd, its subsidiaries and/or its associated companies do not have and have not within the last 12 months had any corporate DISCLOSURE OF CONFLICTS OF INTEREST finance advisory relationship with the issuer covered in this report or any other relationship that may create a potential conflict of interest. RHB Investment Bank Berhad, its subsidiaries (including its regional offices) and 5. RHB Securities Singapore Pte Ltd, or person associated or connected to it do associated companies, (“RHBIB Group”) form a diversified financial group, undertaking not have any interest in the acquisition or disposal of, the securities, specified various investment banking activities which include, amongst others, underwriting, securities based derivatives contracts or units in a collective investment scheme securities trading, market making and corporate finance advisory. covered in this report. 6. RHB Securities Singapore Pte Ltd and its analysts do not receive any As a result of the same, in the ordinary course of its business, any member of the compensation or benefit in connection with the production of this research report RHBIB Group, may, from time to time, have business relationships with or hold or recommendation. positions in the securities (including capital market products) or perform and/or solicit investment, advisory or other services from any of the subject company(ies) covered in this research report.
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Hong Kong The following disclosures relate to relationships between RHBHK and companies covered by Research Department of RHBSHK and referred to in this research report:
RHBSHK hereby certifies that no part of RHBSHK analyst compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this research report.
RHBHK had an investment banking services client relationships during the past 12 months with: -.
RHBHK has received compensation for investment banking services, during the past 12 months from: -.
RHBHK managed/co-managed public offerings, in the past 12 months for: -.
On a principal basis. RHBHK has a position of over 1% market capitalization of: -.
Additionally, please note the following:
Ownership and material conflicts of interest: RHBSHK policy prohibits its analysts and associates reporting to analysts from owning securities of any company covered by the analyst.
Analyst as officer or director: RHBSHK policy prohibits its analysts, and associates reporting to analysts from serving as an officer, director, advisory board member or employee of any company covered by the analyst.
RHBHK salespeople, traders, and other non-research professionals may provide oral or written market commentary or trading strategies to RHB clients that reflect opinions that are contrary to the opinions expressed in this research report.
KUALA LUMPUR JAKARTA RHB Investment Bank Bhd PT RHB Sekuritas Indonesia Level 3A, Tower One, RHB Centre Revenue Tower, 11th Floor, District 8 - SCBD Jalan Tun Razak Jl. Jendral Sudirman Kav 52-53 Kuala Lumpur 50400 Jakarta 12190 Malaysia Indonesia Tel : +603 9280 8888 Tel : +6221 509 39 888 Fax : +603 9200 2216 Fax : +6221 509 39 777
HONG KONG BANGKOK RHB Securities Hong Kong Ltd. RHB Securities (Thailand) PCL 12th Floor, World-Wide House 10th Floor, Sathorn Square Office Tower 19 Des Voeux Road 98, North Sathorn Road, Silom Central Bangrak, Bangkok 10500 Hong Kong Thailand Tel : +852 2525 1118 Tel: +66 2088 9999 Fax : +852 2810 0908 Fax :+66 2088 9799
SINGAPORE RHB Securities Singapore Pte Ltd. 10 Collyer Quay #09-08 Ocean Financial Centre Singapore 049315 Tel : +65 6533 1818 Fax : +65 6532 6211
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