Auto sector TIV still showing growth

PETALING JAYA: MIDF Research has maintained its forecasts and “overweight” call on the automotive sector despite the weak total industry volume (TIV) in September, on the back of improving core operating environment.
“Despite the September weakness, TIV is still showing growth of 2% year-to-date and accounts for 71% of our full-year forecast of 596,000 units. The Malaysian Automotive Association (MAA) expects October TIV to recover on a longer working month while the build-up to year-end sales campaigns should see improvement in TIV for the remainder of the year,” it said in its sector update report today.
MIDF Research noted that Mazda sales have been weak and September TIV has yet to reflect numbers from the new CX5, which is expected to trickle in from October. However, Mazda is a niche player with about 2% market share.
Meanwhile, it said, the new MyVi would be an important catalyst to stimulate TIV for the remainder of the year.
“More importantly, the sector’s underlying core operating environment is turning positive. Currency strength, roll-back of rebates, improving loan approval rate – hire purchase loan approvals have held up above 50% for the past three months – underpin our overweight call on the sector,” MIDF added.
The research house noted that the ringgit’s strength has also been a positive factor for the sector, especially in the past two months. Among the auto players under MIDF Research’s coverage, UMW Toyota has the largest exposure to the US dollar given that all its imported complete knocked down (CKD) kits and complete built up (CBUs) from Thailand are transacted in US dollar.
The ringgit also strengthened against the yen and BAuto is a key beneficiary as its imports are 100% exposed to the currency. Perodua is another beneficiary given its exposure to yen and partly US dollar.
On another note, MIDF Research said most companies are rolling back rebates, based on meetings it had with auto players and ground checks.
“Our chat with Toyota dealers in town suggests distributor rebates have reduced by 30-50% while Tan Chong is also looking to reduce rebates for its models in return for longer warranty period (from three years to seven years),” it said.
Bermaz Auto Bhd remains MIDF Research’s top sector pick at 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 against the yen.