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Automotive-191003-4Q19 Strategy

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Automotive-191003-4Q19 Strategy Sector Update 03 October 2019 Automotive NEUTRAL National Marques Racing Ahead ↔ By Wan Mustaqim Bin Wan Ab Aziz l [email protected] We maintain our NEUTRAL rating on the AUTOMOTIVE sector. The MIER consumer sentiment inde x scored 93.0 pts (+7.4pts QoQ, -39.9pts YoY) in 2Q19 which is below the optimistic threshold (>100pts) due to muted growth post the zero-rated tax holiday. Reflecting this, we are seeing car sales trending in favour of value-for-money national marques. Non-national marques on the other hand, are focusing on higher-margin lower-volume models (catering to higher-purchasing power consumers). Notable developments in Automotive industry in 2019 include: (i) National Marques surpassing Non-National marques’ market share, (ii) Proton is expected to surpass Honda as no.2 trailing behind Perodua in total industry market share TIV powered by the all-new Proton X70, and supported by all-new and face-lifted models, (iii) increasing number of new model launches, and (iv) introduction of the third national car under National Automotive Policy 2019 by year-end. No changes to our 2019 TIV target of 600,000 units matching MAA’s target factoring the extra boost from national marques (Proton and Perodua). Our sector top-pick is BAUTO (OP; TP: RM2.75) which offers a steady dividend yield of 7.2%. National marques affirming leading market position . As of 8M19, the national marques (56%) continued to stay above non-national marques (44%) in terms of market share, marking a year not seen since 2013, attributed to the outstanding sales from Perodua, especially after the introduction of its all-new Perodua Myvi and supported by the all-new Perodua Aruz (25k bookings, 20.3k delivered). This was also boosted by a surge in Proton sales, after the introduction of its all-new Proton X70 (30k bookings, 20.4k delivered), and supported by fresh new face-lifted, improved technological variants of existing line-ups (Iriz, Persona, and Exora). Proton will be launching an all-new X70 CKD in 4QCY19, while in 2020, an all-new X50 (based on Geely Binyue) and Proton/Geely Jiaji (MPV) are in the pipeline. On the other hand, Perodua plans launching an all-new SUV in 2H2020, probably a 5- seater version, indirectly competing against Proton X50. Notable changes include Honda targeting lower sales for 2019 at 95,000 units, versus 102,282 units sold in 2018. The marque’s 2018 market share was 17.1% premised on Honda City (32%), Civic (16%) and CR-V (13%). Nevertheless, the reported 8M19 sales showed Honda losing market share – down to 15% with Proton closing in to the same position. Moving forward, we expect a stronger growth for National Marques, hence , we upgrade DRBHCOM to MP from UP with unchanged SoP-derived TP of RM2.60. DRBHCOM’s share price has plunged 17% since our last downgrade to UP call and we believe that much of the negatives have been priced in at this juncture. National marques improved sales volume, while Non-nationals achieved better margin sales in 2Q19. In 2Q19, overall mixed performances, with 3 out of the 6 stocks (BAUTO, MBMR, and SIME) performing above expectations while 2 stocks (DRBHCOM and TCHONG) were below expectations. One (UMW) was within expectation. Perodua-linked companies (UMW, MBMR), recorded stronger performance mainly from the higher associates’ contribution buoyed by the all-new Perodua Myvi and Aruz, as well as supported by better core segments. BAUTO and TCHONG recorded higher margin sales, but TCHONG disappointed due to higher effective tax rate and poor contribution from its local operation while SIME saw stronger Industrials performance and an unexpected push from Automotive segment. DRBHCOM recorded dismal profit compared to previous quarter especially from slowing Proton X70 sales at the tail end of CBU deliveries (-23% QoQ). Looking forward to 2HCY19, vehicles sales volume for 3QCY19 is expected to be weaker than 2QCY19 in the absence of festivities and due to the higher base for Hari Raya Aidilfitri promotional activities. Nonetheless, we expect 4QCY19 sales to make up for the rest of the year, boosted by the usual year-end promotion as well the anticipation of another cut in Base Lending Rate (BLR) by 20-25bps (In November 2019), to meet our year-end target of 600,000 units, in-line with MAA’s target. YTD new launches include Perodua ARUZ, the face-lifted Honda HR-V (includes Hybrid), face-lifted Proton IRIZ and Persona, Toyota Vios, Toyota Yaris, Toyota Rush, T32 Nissan X-Trail facelift, 2019 Proton Exora RC, Mazda 3 (Sedan & Hatchback), face-lifted Perodua Axia, all-new A90 Toyota Supra (CBU), face-lifted Mazda CX-5 (30 th September 2019), and Mazda CX-8 (1 st October 2019). Upcoming new launches include the, face-lifted Honda Accord, Mazda CX-30 (CBU, 2H19), and Proton X70 (CKD). There are also a stream of unannounced all-new launching waiting for pricing approvals and better incentives program under NAP 2019. We maintain our 2019 TIV target at 600,000 units (+0.2%). We maintain our 2019 TIV target at 600,000 units, in line with MAA’s target. We believe the absence of sales-boosting event such as the one-off 2018 tax holiday will be offset by exciting new launches in 2019 and we have also factored in possible delays in new car launches given the backlog of pricing approvals from the authorities (3-5 months), and tepid purchasing power. MITI has decided to increase the frequency of the monthly meetings held by the Automotive Business Development Committee (ABDC), chaired by MITI, from once to twice a month to speed up the vehicles pricing approval. On the other hand, MITI has established a trade and advisory council (TIAC), which will discuss issues on subjects ranging from foreign direct investment (FDI) and domestic direct investment (DDI) to the National Automotive Policy (NAP) in its upcoming meetings (with a minimum of four meetings/year). PP7004/02/2013(031762) Page 1 of 6 Automotive Sector Update 03 October 2019 SUV, the new trend . For segmental targeted sal es, 2019 will be the year of SUV segment led by the introduction of Proton SUV X70 (launched on 12 th December 2018), Proton X70 face-lifted CKD on 2H19, all-new Perodua SUV ARUZ (launched 15 th January 2019), all-new Toyota C-HR (1Q18), Toyota Rush (End-February 2019), face-lifted Mazda CX-5 (30 th September 2019), all-new Mazda CX-8 CKD (1 st October 2019), and all-new Mazda CX-30 CBU (December 2019). Note that, the market share of 4WD/SUV segment had increased from 13.5% in 2018 to 22% as of 8M2019 due to increasing popularity of these vehicles. This will be supported by the value-for-money segment which will be focusing on the affordable variants led by Perodua (Axia, Myvi, Bezza, and Aruz), followed by Honda (with its entry-level Hybrid segment, Jazz and City Sport Hybrid, as well as entry-level SUV segment, the BR-V). Proton has grab the same spot with Honda at number 2 in terms of market share with its popular Proton X70 (30k bookings, 20.4k delivered), and further supported by face-lifted Proton Saga, Iriz, and Persona. National marques continued to be in the lead. Perodua continued to lead the pack with a higher market share of 41% (8M18: 37%), with marginal sales growth (+2% YoY) driven by the all-new Perodua Myvi, and the all-new Perodua ARUZ. This was followed by Honda and Proton at the same position. Honda registered lower market share of 15% (8M18: 18%) with a lower sales growth (-21% YoY) as consumers held back purchases, expecting new models in 2H19, which was delayed due to pricing approval issues. Proton (+37% YoY) gained higher market share of 15% (8M18: 11%) owing to the higher delivery of the all-new Proton X70, and also supported by the existing face-lifted line-ups. Drifting further down the list, Toyota sales volume plunged (-15% YoY) with a lower market share of 11% (8M18: 12%) as Toyota recorded the highest sales volume in history during the tax holiday last year. However, it was cushioned by its best-selling all-new Toyota Vios, all-new Toyota Yaris, and Toyota Hilux. Meanwhile, Nissan (- 25% YoY) saw its market share lowered to 3% (8M18: 4%), due to the lack of new volume-driven model launches; whereas Mazda recorded lower sales (-14% YoY), with unchanged market share at 2% (8M18: 2%) after it fully delivered the discounted all-new CX- 5 in May 2019, and is counting on face-lifted CX-5 and all-new CX-8 to push 2H19 volume sales. Consumer Sentiment Index rose QoQ on better Aidilfitri festive season sales. The Malaysian Institute of Economic Research’s (MIER), Consumer Sentiment Index (CSI) scored 93.0 pts (+7.4pts QoQ, -39.9pts YoY) in 2Q19. The stronger QoQ CSI was boosted by stronger Hari Raya Aidilfitri festive season sales as compared to CNY sales in the previous quarter. On the other hand, the YoY CSI was unable to match last year’s historic tax holiday sales. The CSI is still well below the optimistic level (>100%) as consumers remain cautious on their spending decisions, particularly on high-value discretionary spending such as vehicles, tertiary education, imported goods and overseas travels. Moving forward, business environment for 3Q19 and 4Q19 is expected to be moderate, especially with the lingering concern on the cost pressure from the weakening of local currency against other major currencies (i.e. USD). BAUTO (OP; TP: RM2.75) is our sector top pick : We like the stock for its: (i) expected earnings recovery from the stream of all- new models, especially from its popular, face-lifted/turbo Mazda CX-5, (ii) superior margins which is above industry peers (average profit margin of c.9% vs.
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