Analysts positive on automotive sector

PETALING JAYA: Analysts are positive on the automotive sector, with expectations of strong momentum in the second half of 2017 (2H17), following higher total industry volume (TIV) in August.
"The eight months 2017 TIV sales volume has achieved 67% of our 2017E TIV sales of 592,000. We believe 2H17 momentum will likely remain strong, supported by new model launches in the pipeline and year-end promotional campaigns," Affin Hwang Capital said in its report last Thursday.
The research house, which maintained its "underweight" rating on the sector, said that upside risks include minimal compression in profit margins and unexpectedly strong TIV sales.
However, it noted that downside risks could come from a prolonged tightening of auto financing that could hinder the borrowing ability of car buyers, exchange rate risk and a slowdown in the economy.
It has a "sell" call on both UMW and APM, with preference for MBM Resources for sector exposure.
The Malaysian Automotive Association (MAA) reported automotive sales of 51,700 units for August, reflecting a 6.5% month-on-month growth. Year-to-date, automotive sales hit 384,700 units, growing 3.9% year-on-year.
MIDF Research said the latest TIV is still well above its forecast growth of 2.7% year-on-year to 596,000 units, and sees possibilities of further upside to its target, although it would depend on the build-up to the year-end sales campaigns.
"Toyota launched four facelife models and additional variants for the Vios/Camry/Fortuner/Hilux/Innova, mostly in September 2017. Mazda is expected to launch its new generation CX5 within the next two weeks (most of the numbers to trickle in from October) while a big launch, we think, would be Perodua's new MyVi in 4Q17. These launches could stimulate further strength into 4Q17," it said in its report.
Meanwhile, the ringgit's strength bodes well for the sector. Among the automotive players under its coverage, UMW Toyota has the largest exposure to the US dollar given that all its imported complete knocked down (CKD) kits and complete built ups (CBU) from Thailand are transacted in US dollar.
"Given low localisation rates of 20-60% relative to the national makes of 80-95%, we estimate around half of total component costs are imported. Tan Chong meanwhile, is estimated to have circa 80% of total imported cost exposure to US dollar imports with the rest in Japanese yen," it said.
It noted that every 1% change in the US dollar impacts its FY18F by 4.7% for UMW Group and 16% for Tan Chong. As Tan Chong is loss-making relative to the steady state earnings of RM200 million to RM300 million per annum prior to the downcycle, it is more sensitive to forex changes now.
In the past six months, the ringgit had also strengthened against the yen. Bermaz Auto (BAuto) is a key beneficiary of this strengthening, as its imports are 100% exposed to the yen. The company is exposed to the currency via CBU imports whereas CKDs namely the CX5 and Mazda 3 models are purchased at a fixed ringgit price from 30%-owned Mazda Malaysia Sdn Bhd, which is the importer of Mazda CKD kits and assembler.
"To make this possible, Mazda Malaysia absorbs yen volatilities from CKD imports, which means that it also benefits from the current ringgit strength. We estimate that every 1% strengthening of the ringgit against the yen impacts BAuto's FY18F earnings by 3%," said MIDF Research.
It said that Perodua is also a beneficiary given its exposure to the yen and every 1% change in the currency impacts its FY17F by 1%. Note that UMW is the largest shareholder of Perodua with a 38% stake.
BAuto remains its top sector pick at an unchanged target price of RM2.55 with key catalysts being a 30% year-on-year increase in FY18F TIV, more than doubling in associate earnings contribution, attractive dividend yield of 6%, value unlocking from the listing of BAuto Philippines and stronger ringgit.
It maintained its "overweight" rating on the sector.