The automotive sector’s recently concluded 1QCY23 results saw improved earnings delivery vs. three months ago, with 33% of the results coming in above, 50% within, and 17% below, versus 50% within, and 50% below in 4QCY22. Most players under coverage for Kenanga recorded higher sales driven by new models, increased deliveries backed by production ramp-up, and better margins due to lower input costs.
Under coverage of the House, BAUTO and DRBHCOM performed above expectations on higher blended margins with product mix skewed towards high margin models. On the other hand, MBMR, UMW, and TCHONG met expectations. Meanwhile, SIME was disappointing with its prolonged margin compression at its auto business in China which negated brisk equipment sales, particularly in Australia on its economy reopening, and commodities boom. BAUTO was driven by robust demand for high-margin all-new Mazda, Peugeot, and Kia vehicles, while DRBHCOM benefitted as Honda Malaysia’s production recovered from the sales of high-margin Honda HR-V. Its upcoming new production of the all-new Honda WR-V will fill the void in Honda offerings of small-SUV, by 3QFY23. On the other hand, strong showing from manufacturing associate Perusahaan Otomobil Kedua Sdn Bhd on high production volume and lower input costs negated the lower seasonal sales for MBMR and UMW. TCHONG, however, still suffered losses albeit at a reduced level due to: (i) the lack of new launches while its competitors have flooded the market with attractive new models, and (ii) its inability to raise prices to pass on rising production cost, especially with the weakening of MYR against USD.
Kenanga is maintaining its CY23 TIV projection of 720k units which will match the record level achieved in CY22. The optimism it said was underpinned by: (i) strong consumer confidence supported by a stable economy and a healthy job
market, (ii) the affordability of motor vehicles underpinned by stable new car prices thanks to the deferment of new excise duty regulations (that could have resulted in prices of locally assembled vehicles increasing by 8%-20%) and potentially cheaper hire purchase cost with the introduction of reducing balance method in the calculation of interest charges, and (iii) attractive new models. The projection is about 11% higher than the 650k units projected by Malaysian Automotive Association (MAA). The industry’s total booking backlogs have held up at a fairly strong level of 275k units compared to bookings of 300k units three months ago despite heavy deliveries. This indicates sustained strong buying interest, lured by attractive new model launches by players. We foresee a similar pattern throughout the rest of the year.
Sector-top picks are:
MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of 190k units (almost half of
its CY23 target sales of 314k units), (ii) it being a good proxy to the mass-market Perodua brand given that it is the
largest dealer of Perodua vehicles in Malaysia, as well as its 22.58% stake in Perusahaan Otomobil Kedua Sdn Bhd,
the producer of Perodua vehicles, and (iii) its attractive dividend yield of about 7%.
BAUTO for: (i) its strong earnings visibility backed by an order backlog of 8k units for Mazda, Kia and Peugeot
vehicles (half of its CY23 target sales of 19k units), (ii) its premium mid-market Mazda brand that offers the best of
both worlds, i.e. products that appeal to the middle-income group and yet command superior margins than its peers in
the mid-market segment, and (iii) its attractive dividend yield of about 7%.
