Upbeat on Auto & Autoparts Sector for 2H2022, But Cautious for 2023: RHB IB

RHB Research has maintained “Neutral” rating on Auto & Autoparts sector, but premised on a cautious forecast of 2023.

The auto & autoparts 2Q22 sector results came above the research house’s expectations, mainly driven by better-than-expected margins. The research house gathered that July orders were generally down 20-30% from 1H22 averages, but are gradually recovering MoM. Chip supplies have also started to normalise, but marques across the board are still short on various components. While the management teams of companies the research house covers are upbeat on 2H22 prospects, some are cautious on the possible macroeconomic headwinds in 2023.

Above expectations. 2Q22 results were above expectations, mainly driven by better-than-expected margins. UMW and Tan Chong Motor’s cost-containment measures and FX hedging strategies have helped them cushion the impact of a strengthening USD/MYR and costlier car parts. Sime Darby’s better-than-expected margins from the Australasia industrial
segment lifted its 4QFY22 (Jun) earnings. Its car sales in China were only declined 1.4% QoQ. MBM Resources and Bermaz Auto booked results that came within expectations.

July orders down 20-30%, but recovering MoM. Following the end of the Sales & Service Tax (SST) exemption in end-June, orders for new cars generally softened 20-30% in July. The research house gathered that orders have risen MoM in August but still remain subdued vs 1H22’s strong sales.

Chip supplies normalising, still short on components. RHB Research gathered from executives and salespeople that supply chain issues have eased significantly. Most marques have secured sufficient chip supplies, but are still facing component shortages. For example, certain European marques are still lacking wire harnesses, speakers and head lamps.

Auto executives are upbeat on 2H22, but cautious on 2023, as they cited potential macroeconomic headwinds and their potential impacts to car sales. In particular, MBM’s management pointed out that macroeconomic headwinds will likely impact the lower-/middle-income earners the most, weakening their purchasing power – which could weigh on new car sales for the affordable brands.

RHB Research has raised auto & autoparts sector earnings by 5% for 1-year forward earnings, mainly lifted by the 27% increase for UMW, as it lifted its auto margin and UMW Toyota unit sales assumptions. The research house also lifted 2-year forward (FY+2) earnings by 2%, as its higher Perodua sales assumption (fuelled by the popularity of the all-new Alza) boosted UMW’s and MBM’s earnings forecasts. It is expected earnings for most players to decline in FY+2 due to softening car sales in 2023, except for Bermaz Auto (BAUTO) and Sime Darby (SIME), driven by growth in Kia/Peugeot sales and industrial segment, respectively.

Still maintaining “NEUTRAL” on the auto & Autoparts sector. While 2H22 earnings will likely be strong, fuelled by the strong order backlog, we remain cautious on the softening car sales in 2023, given the challenging macroeconomic outlook. The research house still favours BAUTO for its 7% FY23F yield and growth in its Kia and Peugeot brands, and SIME for its c.5% yield and resilience in its industrial segment and high-end motor brands.

Downside risks: persistent shortages of key components and delays in new model launches. Whilst other risks: Tighter bank approvals for car loans and a weaker MYR. The opposite circumstances would present upside risks.

Top Picks – Target Price
Bermaz Auto (BAUTO MK) – BUY MYR2.35
Sime Darby (SIME MK) – BUY MYR2.55

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