Automotive business said to contract in first half

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Automotive sector
Maintain neutral:
We expect first half 2015 (1H15) total industry volume (TIV) growth to contract 3% to 5% year-on-year (y-o-y) to approximately 320,000 against a high base in 1H14 (+6% y-o-y to 333,000 units) before catching up in 2H15 to meet our 2015 target of 660,000 units. This is in view that consumers will tighten their belts and adopt a wait-and-see approach as they brace for higher cost of living and uncertainties to car prices from the goods and services tax implementation in April. Nonetheless, shortfalls in the public transportation system coupled with the normal replacement for old cars should sustain the TIV level.

We like auto players with presence in the economical car segments (in view of higher cost of living) and which are not overcrowded by intense competition (i.e. in the B-segment). We favour Perodua for we believe its newly-launched A-segment Axia is a game changer, timely for potential trading down by consumers. Globally, we see a shift in consumer preference to sports utility vehicles and as such, we laud Honda and Mazda for their planned model launches in the smaller and more economical crossover utility vehicle (CUV) segment (i.e. Honda HR-V & Mazda CX-3) in 2015.

Auto players import cars/components in either US dollars or Japanese yen, and foreign exchange has proven to have a material impact on auto players’ cost of goods sold and margins. In view of a softer yen and stronger dollar against the ringgit, we prefer Japanese importers and avoid US importers. In the past five months, the dollar has surged 9% against the ringgit to US$1 per RM3.50 and our forex research expects an average US$1 per RM3.50 in 2015. We expect the yen-ringgit exchange rate to stay soft, averaging ¥100 per RM3 in 2015 with recently re-elected Japanese Prime Minister Shinzo Abe expected to continue the stimulus and quantitative and qualitative easing programme.

We favour MBM Resources Bhd and Berjaya Auto Bhd primarily for their (i) presence in the economical car segment (i.e. A and CUV segments respectively), (ii) positive yen exposure and (iii) undemanding valuations. Meanwhile, we avoid raising exposure in UMW Holdings Bhd and Tan Chong Motor Holdings Bhd for their (i) dependence in the competitive B-segment and (ii) negative US dollar exposure. — Maybank IB Research, Jan 2


This article first appeared in The Edge Financial Daily, on January 5, 2015.