Research houses today (Dec 18) issues a NEUTRAL stance on automotive sector as the sector’s outlook remains hazy and projects a lower industry-wide sales volume, also known as total industry volume (TIV).
RHB Investment Bank said (RHB IB) maintains a NEUTRAL call for auto & autoparts sector (automotive), premised on an uncertain 2024.
“We introduce our 2024 TIV forecast of 625,000 units, implying a 14% YoY decline from our 2023 projection of 725,000.
“We are anticipating a softer TIV, as we do not see any compelling factors for 2024 auto sales to book another year-high,” it said in its Malaysia Sector Update.
The research house said as the 3Q23 sector results for the companies under its coverage were above estimates, mainly as average selling prices (ASPs) surprised on the upside.
“Order backlogs continued to ease as companies posted stronger delivery of sales units. We anticipate 2023 will be a record-breaking year for TIV, with strong 4Q23 results ahead,” it said.
The research house said the performance of the auto sector exceeded expectations as Sime Darby Bhd, UMW Holdings Bhd (UMW) and Bermaz Auto Bhd (BAuto) beat expectations.
Meanwhile, it said Tan Chong Motor Holdings Bhd (Tang Chong) fell short of expectations as it fell further into the red.
“Sime Darby began its FY24F (June) with robust 1QFY24 results, backed by stronger year-on-year (YoY) contributions from the automotive and industrial segments.
“Its auto sales volumes in Malaysia and China have exceeded our forecasts, although automotive earnings from the latter were dragged by lower ASPs due to the electric vehicle (EV) price war.
“Meanwhile, its Australasia industrial segment continued to chart solid earnings, thanks to its newly-acquired subsidiary, Onsite Rental,” RHB IB said.
UMW’s performance, on the other hand, beat RHB IB’s expectations.
“Our TP of RM5 (which matches the valuation implied in Sime Darby’s acquisition offer) is maintained as it implies a 14x FY24F P/E, above its historical mean of 12x.”
The research house said 1QFY24 (April) stronger-than-expected results were mainly due to earnings beat from stronger-than-expected sales volumes in Malaysia and the Philippines, as well higher-than-estimated ASPs in Malaysia.
“In the broader context, 3Q23 sector-wide sales volume in Malaysia rose 19% quarter-on-quarter (QoQ), in view
of a seasonally shorter working 2Q.
“Our 2023F total industry volume (TIV) will likely exceed estimates, but this is already in the price. November recorded TIV of 72,000, bringing year-to-date (YTD) TIV to 719,000 units.
“Given the average trailing 12-month average is 66,000, it is safe to assume that 2023 will be another record-breaking year for TIV, likely due to downtrading activities to cheaper cars.
“However, we believe the market has already priced in the potential of another record-breaking year in 2023,” it said.
RHB IB said the easing backlog of major marques such as Perodua and Toyota, which have decreased from 155,000 and 40,000 as of end-August to 140,000 and 34,000 as of end-November respectively supports its thesis that TIV in 2024F will likely soften YoY.
“(This is) especially after the two solid years including 2022 and 2023. While there are upcoming launches of new EVs within the 2024 pipeline, for example, BYD Seal, Volvo EX30, and Toyota bZ4X, we do not think this will significantly move the 2024F TIV needle,” it added.
Meanwhile, Kenanga Research downgrades its call to NEUTRAL from OVERWEIGHT.
Similar to RHB IB, it is projecting TIV to contract by 8% to 710,000 units in CY24 down by 7.8% from RM770,000 in CY23 as fuel subsidy rationalisation is likely to hurt the demand for mid-market models.
“However, we remain optimistic on vehicle sales in the affordable segment as the buyers, for example, the B40 group, will be spared the impact of subsidy rationalisation.
“(It) also could potentially benefit from the introduction of the progressive wage model,” it said in its Sector Update today.
It said that the industry’s earnings visibility is still strong, backed by a booking backlog of 220,000 units as at end-Nov 2023.
“More than half of the backlog is made up of new models, alluding to how appealing new models are to car buyers. We expect a similar trend in CY24, given an equally strong line-up of new launches during the year.
“Meanwhile, excitement is building in the electric vehicle (EV) segment with the recent new launches of BYD Seal and Tesla
Model 3 with expected introduction of locally-made first national EV such as from Proton Holdings Bhd or Perusahaan Otomobil Kedua Sdn Bhd (Perodua) in CY25.”
The research house believes new car is still an affordable luxury for most Malaysian households despite the high inflation and a slowing global economy underpinned by strong consumer confidence and affordability of motor vehicles.
“Perodua, the maker of the affordable and fuel-efficient Perodua vehicles, will be running at full capacity in CY24 to fulfil in a huge booking backlog of 140,000 units.
“(This is) equivalent to almost half its CY24 sales target of 330,000 units. As such, based on our estimates, Perodua is poised to expand its market share to 47% (from an estimated 42% in CY23),” it said.
In terms of new models, both Perodua and Proton have been selling well especially because of their competitive price, and has in the last quarter of the year come out attractive new models.
“Perodua is ahead in the new model race (in term of volume) with the launch of the all-new Perodua Axia (with improved features) followed by two more face-lifted models this year, and one new model in early 2024 (Perodua D66B, B-segment).
“On the other hand, Proton recently launched the first mild-hybrid electric vehicle (MHEV) for the local brand, its all-new Proton X90, and its first sedan under Geely partnership, all-new Proton S70 (C-segment sedan at the price of non-nationals B-segment), Proton-SMART (BEV), and five face-lifted models, all within CY23,” it added.
In the space of non-national brands, automakers are shifting away from the highly competitive low-margin segment such
as 7-seater SUVs and focus on premium products that will appeal to the middle-income group, Kenanga added.
It said, additionally, vehicle sales will be supported by new battery electric vehicles (BEVs) in the market that enjoy SST exemption and other EV facilities incentives up to CY25 for complete built-up (CBU) and CY27 for complete knocked-down (CKD).
On research houses top picks for the sector, for the companies under their coverage, RHB IB favours is BAuto while Kenanga prefers MBM Resources Bhd (MBMR).
RHB IB’s top pick is still BAuto as it likes the group’s 10% dividend yield.
“We believe its car sales will remain resilient compared to that of other marques,” it added.
Meawhile, Kenanga likes MBMR as the group is a good proxy to the Perodua vehicle brand, given that it is the largest dealer of Perodua vehicles in Malaysia, as well as its 22.58% stake in Perodua.
“It also offers strong earnings visibility backed by an order backlog of Perodua vehicles of 140,000 units, which is equivalent to almost half its CY24 sales target of 330k units.
“(It also) offers an attractive dividend yield of about 11%. We raise our TP for MBMR by 13% to RM5.50 (from RM4.85) as we now value it at 8x FY24F PER (from 7x previously).
“We narrow its forward PER discount to the sector’s average of 11x to reflect its strengthening market position in the automotive industry.”
