Although RHB Research (RHB) still thinks that 2023 will bring near-record total industry volume levels and strong corporate earnings for the auto and auto parts sector, these factors are largely priced in.
“As such, the market could further factor in the prospect of a softer 2024 future. With orders normalising and waiting periods shortening, we think investor sentiment towards auto stocks could soon turn cautious,” said RHB in the recent Malaysia Sector Update Report.
RHB downgraded their calls for UMW and MBM Resources to NEUTRAL from BUY, but investors should still hold for their 4% and 10% yields. Premised on this, RHB also cut their sector rating to NEUTRAL from OVERWEIGHT.
Quarter one 2023 results met expectations, with the exception of Tan Chong Motor, which recorded surprising losses, and Bermaz Auto, which outperformed estimates.
At various analyst briefings, most auto executives were optimistic in their outlook for the domestic automotive market this year. This is especially so for Toyota and Perodua, which have order backlogs of 49k and 190k units, which puts both marques on track to hit their 93k- and 314k-unit 2023 sales volume targets and RHB’s forecasts of 100k and 320k units.
The outlook for Tan Chong Motor remains gloomy, while Sime Darby’s prospects remain challenging as its China operations may take time to recover.
In RHB’s view, there is a general consensus in the market that 2023 will be a strong year, especially for Toyota and Perodua. RHB also believes that investors are now looking out for a possible slowdown in orders, as this could be an early indicator of a decline in earnings.
“After achieving a record-high total industry volume of 721k units in 2022 and a potentially near-record 2023, we think that orders are more likely than not to slow down in 2024,” said RHB.
Across most marques, orders are already normalising, since many models do not have waiting periods anymore and order backlogs are declining. Imported units and those of specific colours were exempted.
Currently, only Toyota, Perodua and Honda have waiting periods across their models. RHB thinks that 2024 total industry volume could normalise to a level near the low-600k units, while there lacks catalysts that could drive it up to near 700k units. EV adoption is expected to grow but RHB thinks it will not move the total industry volume needle.
“Our sector rating is now NEUTRAL as markets could gradually start to price in a potentially softer 2024. We think that, beyond a strong 2023, there lacks fresh catalysts to bring share prices to new highs,” said RHB.
Although RHB is now less bullish on the sector, they still think UMW and MBM Resources, despite being NEUTRAL stocks, are still worth holding on to, given their 4% and 10% dividend yields.
RHB still likes Bermaz Auto, as they expect its sales volume to grow by 11% year-on-year in financial year 2024 (Apr), driven by lower Mazda CX-30 prices, thanks to its local assembly; and volume growth for Kia and Peugeot, from a low base.
“We also like its 9% financial year24 yield, and think it may close 4Q23 with a special dividend,” said RHB.
Key upside risks identified by RHB include stronger-than-expected orders and deliveries, lower-than-expected costs, and better-than-expected FX movements. The opposite represents the downside risks.
