Automotive Held Back in Anticipation of 2017 Budget By the Kenanga Research Team l research@kenanga.com.my UNDERWEIGHT We maintain our UNDERWEIGHT rating on the AUTOMOTIVE sector given the outweighing of UNDERPERFORM ratings in the total market capitalisation of our stock coverage coupled with the lack of re-rating catalyst as well as rising costs and poor consumer spending. MAA s TIV sales for Oct 2016 registered 47,879 units (-1% MoM, -14% YoY). As a result, YTD 10M16 TIV of 466,208 (-14%) comprised 82% of our 570,000 unit forecast for 2016. We believe the stagnant sales were a result of consumers holding back purchases in anticipation of the introduction of incentive for first-time car buyers. We expect stronger sales to be registered for the remainder of the year, driven by new models launched from prior months as well as aggressive year-end sales and marketing efforts. However, our view remains conservative given the prevailing weakness in consumer sentiment as well as the unfavourable import costs that are corroding automakers profitability. While BAUTO (OP; TP: RM2.67) could face earnings risks should the prevailing MYR weakness persists, it remains as our preferred stock in the sector for now given its: (i) better top line growth prospect from a low base on the back of strong pipeline of exciting models, and (ii) potential dividend pay-out of c.90% (c.8.5% div. yield). Oct 2016 TIV recorded at 47,879 (-1% MoM, -14% YoY). While there was anticipation for sales growth to be seen in Oct 2016 on the back of new model launches to stimulate sales, the net performance fell slightly short compared to Sep 2016 sales. We believe this was due to consumers withholding their purchase decisions pending the 2017 Budget during mid-month where it was previously speculated that certain incentives may be available for first-time car buyers (refer to overleaf for commentary on 2017 Budget incentives for the sector). The YoY weakness (-14%) demonstrates the continued pressure felt by consumers in relation to tighter lending requirements and higher living expenses, as compared to 2015. Proton reflected the strongest MoM gain (+26%), likely led by the new Proton Saga which hit the market in Sep 2016. Honda (+9% MoM) was the only other growing marque, with sales likely driven by the Honda Accord targeted at the upper-middle income consumer segment. On the other hand, Nissan appeared to be one of the worst performers with both MoM (-21%) and YoY (-41%) contraction as consumers continue to favor the fresh selections from its competition as of late. Toyota also fell deep in YoY terms (-42%) from intense competition, but we believe there will be some recovery in the coming months as the face-lifted Toyota Vios has entered into the market. Hoping for a more exciting 4Q16. Though there was some disappointment in Oct 2016 TIV numbers, we continue to believe that new model launches, especially from auto heavyweights that have begun rolling into the market, will revitalise consumer buying interest for those seeking newer selections for vehicle replacements or for first-time vehicle owners. Furthermore, consumers in the lower income segment may at last be loosening their wallets with the Perodua Bezza and the Proton Saga going head-to-head. Other new models launched are the new Proton Persona, the new Honda Civic and face-lifted Accord, the new Toyota Alphard and Vellfire as well as the recently launched face-lifted Vios. Forthcoming model launches are the new Honda BRV, the face-lifted City, Jazz, the new Toyota Innova and face-lifted Camry. In addition, there may be higher levels of demand for Mazda cars for the year given the announcement of a price increase from Jan 2017 as a means for BAUTO to cope with the rising production costs from unfavourable forex. We should also expect other auto players to partake in aggressive sales and marketing campaigns during the year-end period to make up for the slow sales during the year. YTD 10M16 TIV of 466,208 (-14%) comprised 82% of our 570,000 unit forecast for 2016. We made no changes to our yearend forecast as we believe our target is achievable with more robust sales in months to come. That being said, our view on the sector remains conservative as consumer purchases of automobiles have been clamped by stringent lending guidelines as well as prevailing weakness in sentiment resulting from higher living expenses. In addition, automakers have been experiencing a pinch in their profit margins with operating costs being pressurised by unfavorable forex. BAUTO (OP; TP: RM2.67) remains our top pick for the sector. Though we are in the midst of re-evaluating the stock s earnings prospect in view of its high exposure to the Japanese Yen which has been trailing at high levels over the past several months, we believe the stock may yet outperform its peers given that its targeted customer base in the middle-income to highincome bracket are less sensitive to the rising cost of living. More positively, the recent management buyout could also remove the overhang on its shares while a positive knee-jerk reaction could be reflected in the share price in the foreseeable future. We also see a high-potential value to be unlocked with the proposed listing of its Philippines subsidiary given the robust growth prospect. All in, we are still optimistic with its investment merits supported by: (i) better top line growth prospect from low base on the back of strong pipeline of exciting models, and (ii) potential dividend pay-out of c.90%, which translate into fair dividend yield of c.8.5%. BAUTO is currently trading at an undemanding valuation of 13.9x forward PER, which is below industry average forward PER of 30.0x. PP7004/02/2013(031762) Page 1 of 5
Other salient points Commentary on 2017 Budget incentives. Although the incentive for first-time car buyers did not materialise, the government presented incentives on grants to 12,000 qualified taxi drivers and a rebate of RM4,000 will be provided for the purchase of the Proton Iriz by purchasers who are qualify for aid in the 1Malaysia People s Aid (BR1M) scheme for the purchase of partaking in ride-sharing services with providers such as UBER as a means to generate additional income. However, we believe the budget allocation will only yield minimal benefit given: (i) the limited base of taxi drivers allocated by the government, and (ii) the rebate from the Proton Iriz will bring its price to a direct competition with the more affordable Proton Saga which is likely to garner a larger market share. October 2016 s sales for passenger and commercial vehicles according to top marques Marques (units) Oct-16 Oct-15 Sep-16 % y-o-y % m-o-m YTD 2016 YTD 2015 % y-o-y Passenger Perodua 16,148 17,305 17,147-7% -6% 167,037 174,832-4% Proton 7,640 8,026 6,062-5% 26% 57,731 86,861-34% Honda 8,204 8,504 7,498-4% 9% 71,466 74,915-5% Toyota 3,686 6,325 3,864-42% -5% 34,206 48,983-30% Nissan 1,913 3,216 2,407-41% -21% 27,030 34,249-21% Mazda 991 1,200 1,009-17% -2% 10,821 10,851 0% Others 3,940 4,482 4,657-12% -15% 45,102 50,158-10% Total 42,522 49,058 42,644-13% 0% 413,393 480,849-14% Commercial Toyota 1,814 2,675 1,816-32% 0% 15,814 22,114-28% Isuzu 1,046 904 993 16% 5% 10,063 9,432 7% Nissan 541 484 642 12% -16% 5,822 4,210 38% Mitsubishi 419 516 388-19% 8% 4,581 4,648-1% Hino 418 462 339-10% 23% 3,993 4,014-1% Mazda 13 73 11-82% 18% 267 808-67% Others 1,106 1,577 1,358-30% -19% 12,275 15,167-19% Total 5,357 6,691 5,547-20% -3% 52,815 60,389-13% TIV 47,879 55,749 48,191-14% -1% 466,208 541,238-14% Total Industry Volume from October 2011 to October 2016 PP7004/02/2013(031762) Page 2 of 5
Market share of top marques (Passenger) in October 2016 Market share of top non-national marques (Passenger) Market share of top marques (Commercial) in October 2016 PP7004/02/2013(031762) Page 3 of 5
Malaysian Automotive Peers Comparison NAME Price @ 18/11/16 Mkt Cap PER (x) Est. Div. Yld. Hist. ROE Net Profit (RM m) (RM) (RM m) Actual 1 Yr 2 Yr (%) (%) Actual 1 Yr 2 Yr (%) (%) (RM) Fwd Fwd Fwd Fwd BERMAZ AUTO BHD 2.11 2,416.9 12.3 13.9 9.8 8.5% 43.5% 197.6 174.6 247.2-11.6% 41.6% 2.67 OP DRB-HICOM BHD 1.22 2,358.5 N.M. 87.1 32.1 1.6% 6.3% -991.9 27.8 73.5-102.8% 164.4% 1.02 UP MBM RESOURCES BERHAD 2.50 976.8 11.6 13.5 10.5 2.8% 5.0% 84.0 72.2 93.4-14.0% 29.4% 2.37 UP TAN CHONG MOTOR HOLDINGS BHD 1.86 1,214.2 21.1 N.M. 48.9 2.7% 2.0% 57.1-70.0 24.7-222.6% -135.3% 1.66 UP UMW HOLDINGS BHD 5.15 6,016.7 25.1 63.6 20.2 1.6% 4.0% 239.7 94.3 298.4-60.7% 216.4% 4.45 UP Source: Kenanga Research 1 Yr Fwd NP Growth 2 Yr Fwd NP Growth Target Price Rating This section is intentionally left blank PP7004/02/2013(031762) Page 4 of 5
Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). MARKET PERFORM : A particular stock s Expected Total Return is WITHIN the range of 3% to 10%. UNDERPERFORM : A particular stock s Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). Sector Recommendations*** OVERWEIGHT : A particular sector s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). NEUTRAL : A particular sector s Expected Total Return is WITHIN the range of 3% to 10%. UNDERWEIGHT : A particular sector s Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) 8th Floor, Kenanga International, Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Telephone: (603) 2166 6822 Facsimile: (603) 2166 6823 Website: www.kenanga.com.my Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 5 of 5