Auto sector could face margin squeeze

PETALING JAYA: AmResearch has maintained a "neutral" call on the country's automotive sector but cautioned that the sector could face margins depreciation due to the devalued currency.
"While we reaffirm our contrarian positive view on total industry vehicle (TIV) growth (i.e. +3.6% year-on-year in 2015), we are in-line with consensus on expectations of poor earnings given currency volatilities, which will impact margins negatively for key players," said its analyst Hafriz Hezry in a report yesterday.
Hafriz expects discounting in the auto industry to have been largely rolled back post Q1 2015 given the significant impact the stronger US dollar would have on the major players' margins.
"Q4 2014 already saw sector pretax margins contract despite positive TIV growth during the period, while Q1 2015 earnings will be more reflective of the uptrend in US dollar," he said.
The auto industry delivered strong sales in March, rising by 14% from a year ago and a whopping 34% increase over February, to register at 67,310 units.
The strong sales were to a certain extent inflated by consumers buying ahead of the Goods and Services Tax (GST) implementation given uncertainties in car price movement post-GST, back then.
Eventually however, major carmakers reduced pricing mainly for completely knocked down (CKD) models by between 0.1% and 6%.
"While the lowering in car price is a positive for demand, April TIV could weaken month-on-month given the normalisation of the pre-GST buying rush and as consumers adjust to the impact of GST on the cost of living," Hafriz said.
However, he noted that Q1 2015 TIV was impressive in relative to consensus expectation of a year-on-year contraction and underpins the view of pent-up demand returning to the market after an exceptionally weak year in 2014.
He noted that the TIV in Q1 2015 was 168,302 units which was 5% better that a year before but on an annualised basis was still 2% below than his estimate of 690,000 units.
However, he pointed out that this has to be taken into context with the seasonal February weakness being a short working month.
Mazda was again one of the strongest performers among the non-nationals, registering a 64% growth while Honda grew by some 95%.
"Both players are notably some of the earliest beneficiaries of the Energy Efficient Vehicle program launched in the 2014 NAP. Honda has now overtaken Toyota as the largest non-national with a 13% market share," he said.
National cars made a comeback this year and maintained their lead in market share in March.
Perodua registered a 38% increase in TIV reflecting the strong demand for the Axia and gradual increase in Axia production.
"Perodua's Q1 2015 TIV of 57,153 units, if annualised (ie. at 228,612) would have been 10% ahead of our FY15 of 207,772 units," he said.
AmResearch's top pick for the sector was MBM Resources Bhd "given the more meaningful upside, undemanding valuations and potential outperformance of Perodua TIV".