Sector results for auto & autoparts for third quarter of this year (3Q22) were above estimates, mainly as unit sales surprised on the upside, as RHB Research stated in its sector update report. Supply chain bottlenecks continued to ease and companies capitalised on this to fulfil outstanding orders.
Despite the absence of the sales and service tax (SST) exemption, orders have been gradually recovering on a monthly basis, driven by new facelifts and models. Hence, the research house expects 2022 TIV to race towards a record-breaking 700k units, with strong final quarter (4Q22) results ahead.
Higher-than-expected unit sales caused 3Q22 sector results to beat expectations. MBM Resources, UMW, and BAUTO beat expectations, while SIME’s Malaysia auto sales were above forecasts of RHB Research. Tan Chong Motor was the only one that disappointed on lower-than-expected unit sales.
Despite the end of the SST exemption, orders are recovering. Across the industry, orders softened meaningfully in July, with orders down 30-50% compared to 1H22 averages. However, since then, most marques have seen gradual month-on-month (MoM) improvements, as consumers adapted to SST-inclusive prices. Orders for some marques are back to levels recorded earlier in the year, as new product launches are driving these orders. For example, Perodua’s current 200k order backlog is partially driven by the new Alza, which is proving to be very popular.
USD/MYR impact manageable. In 3Q22, the USD strengthened against the MYR by 6%. As UMW and Tan Chong Motor both import their CBU units and CKD kits in USD currency, they were vulnerable to the strengthening USD/MYR.
In 3Q22, the stronger USD translated into higher-than-expected COGS for Tan Chong Motor, weighing on earnings.
Meanwhile, UMW’s PBT margin was surprisingly resilient, showing only a 0.2ppt decline to 3.2% from 3.4%. UMW’s management has attributed the resilience to its cost-containment measures, which helped cushion the impact of a strengthening USD/MYR. On a group level, UMW has a natural hedge against the strengthening USD/MYR, as its associate (Perodua) and other segments – some of which earn in USD – cushion UMW’s impact.
RHB Research has lifted sector earnings by 8%, 5%, and 5% for the one, two, and three-year forward earnings (without accounting for SIME’s outsized downward earnings revision), mainly lifted by higher Perodua unit sales assumptions, given its stronger-than-expected orders.
The research house has reiterated its NEUTRAL recommendation and cautious stance on the sector, given expectations of softening economic growth in 2023. it still finds BAUTO attractive for its FY24F yield of 7% and continued growth of the Kia and Peugeot brands. BAUTO’s launch of the CKD Mazda CX-30 (currently CBU) should also further drive Mazda unit sales.
On top of that, the research house also likes SIME for its premium marques, which make it relatively more resilient against macroeconomic risks. SIME is also an attractive China reopening play, given its significant operations in China.
Downside risks include worse-than-expected slowdown in car sales in 2023, resurgent supply chain constraints, and weakening of the MYR.
