RHB Research maintains an on the auto and auto parts industry, naming UMW and Bermaz Auto (BAUTO) as top picks.
Besides BAUTO’s outstanding performance, the 4Q22 (fourth quarter of 2022) results of other companies under the coverage were below expectations, given RHB Research’s initial high estimates following a quarter that saw a record-breaking total industry volume of 203,758 units, or a 10% increment quarter on quarter.
Currently, orders remain strong, as consumers are lured by new model launches. The existing order backlog shows earning visibility, translating to attractive 4-10% yields. UMW and MBM Resources came in below expectations, mainly weighed by their associates, where the 38%- and 20%-owned Perodua saw higher-than-expected material and labour costs (eg. overtime costs) in 4Q22, weighing on healthy sales.
Channel checks done by RHB Research with a key Perodua supplier (Betamek (BETA MK, NR)) revealed that it had started passing on higher raw material costs to Perodua during the quarter. That said, UMW’s management has indicated that Perodua’s cost has been much more manageable in 1Q23.
Sime Darby fell short of expectations, mainly dragged by its China auto segment, where the high COVID-19 cases disrupted its after-sales service, and vehicles are continuously being discounted within this environment of recovering supply and lower demand.
The negative performance by Tan Chong Motor was surprising. The organisation recorded a large core net loss in 4Q22, causing a net loss for the full year. On the other hand, BAUTO’s first nine months of the financial year 2023 (up to April) results were beyond expectations, with its volume and associate contribution being higher than expected.
With the expiry of the sales and service tax (SST) exemption, consumers have adapted to the SST-inclusive prices again. They are once again placing orders, especially for newly launched cars.
As of February, Perodua had 220k orders, which equals its pre-pandemic 5-year average sales of 219k units per year. With a sales target of 314k units (+11%), Perodua only needs 94k orders in the remainder of 2023. RHB Research believes this will be largely supported by the all-new Axia.
Toyota is aiming for 93k unit sales (-8%) in 2023 and already has 50k orders. Proton and Honda are targeting 140k (+3%) and 80k (+0%) in sales volume in 2023. The overweight call by RHB Research was influenced by the strong orders on hand, which could be further supported by more upcoming launches in 2023.
RHB Research stated that the strong orders (guided by the various managements) are better than expectations, given higher borrowing costs and continuing inflation. The lack of an excise duty reform in 2023 also removes a key uncertainty in this sector.
With supply chain constraints largely vanishing, auto companies can better manage their production and convert orders into deliveries, and thus earnings. RHB Research’s top picks are UMW and BAUTO. The rationale behind UMW is due to its status as a liquid proxy for Perodua’s expected strong 2023, and for its aerospace segment turnaround. UMW also offers a decent dividend yield of 4%.
RHB Research views BAUTO favourably because of its expected growth across all three models, driven by the local assembly of the Mazda CX-30, and by the continued introduction of new Kia and Peugeot models. It also offers a 9% dividend yield next year. Key risks include softer-than-expected orders and deliveries, and reoccurring supply chain issues.
