Half-year figures setting trend for less-than-stellar second half
THE numbers are in: half-year vehicle sales figures came in slightly lower then expected, setting the trend for a less-than-stellar second half.
Based on statistics by the Malaysian Automotive Association (MAA), total industry volume (TIV) is set to record its lowest growth in five years this year – a measly 0.5% to 670,000 units from the 666,465 units achieved last year.
Still, the MAA is optimistic that vehicle sales in the second half of the year will be better, compared with the first six months.
Better second half?
AffinHwang Capital Research in its report says it “maintains its base case assumption” of better industry sales in the second half, underpinned by consumer spending recovery, albeit at a moderate pace, and increased sales campaigns from auto players.
“That said, we believe the heightened competition and an unfavourably weak ringgit versus the US dollar (increased cost pressure) operating environment should prove difficult for auto players that lack a strong model line-up, for example UMW Holdings Bhd.
“We maintain our 2015 TIV forecast of 680,000 units. We are neutral on the sector, with our top pick being MBM Resources Bhd.”
“We maintain our TIV growth target of 0.5% to 670,000 units for 2015. We anticipate the market to normalise in light of higher living costs and uncertain economic conditions which may adversely affect consumer confidence on big-ticket items, thus offsetting any gains made from lower price levels.”
The research house says it remains positive on MBM Resources and Berjaya Auto Bhd (BAuto), as it foresees these stocks to directly benefit from the strong sales growth for both Perodua and Mazda vehicles, respectively.
Kenanga Research also says it expects a better second half to make up for the shortfall in the first half.
“We believe auto sales will pick up in the second half to make up for our flat TIV growth assumption, underpinned by aggressive advertising and promotional (A&P) activities, festivities and stronger seasonal patterns.”
The research house notes that second-half auto sales for the past three years accounted for 51% to 52% to the full-year TIV numbers.
“Meanwhile, to make up for the lagging sales caused by weaker consumer sentiment in the first half, we believe auto companies will be more aggressive on A&P activities for the remaining months of 2015.
“Thus, we view that stronger sales in the second half is very likely to be at the expense of margins erosion.”
Kenanga Research says margins will be affected by the “same old issue of unfavourable exchange rates,” particularly to auto players such as UMW and Tan Chong Motor Holdings Bhd.
“These companies have high denominated US dollar costs due to the import of completely-built-up vehicles (CBU), completely-knocked-down (CKD) packs and other components, which will continue to corrode their profitability.”
The research house says this is evident from the subpar first-quarter 2015 results of UMW and Tan Chong, where the higher CKD kits and CBU costs were the main culprits.
“Zooming further into these two stocks, while around one-third of both group’s costs are denominated in US dollars, the net fluctuation impact to UMW is relatively immaterial compared to Tan Chong as the revenue of its listed subsidiary UMW Oil & Gas (90% derived from US dollars) acts as a natural hedge.
“Our sensitivity analysis suggests that for every 1% fluctuation in the US dollar from our base case, UMW’s bottom line could be affected by 3%.”
For Tan Chong, Kenanga Research says that for every 1% fluctuation in US dollar, the company’s bottom line could be affected by 6%.
“We have imputed an average RM3.50 to the US dollar exchange rate for 2015 for the above mentioned companies.”
The research house is positive on BAuto, as around 50% of its total costs is exposed to the Japanese yen, which is still weakening compared to the ringgit.
“With the ongoing monetary stimulus programme implemented by Bank of Japan, we expect the yen to stay soft. We have imputed an average RM3.05 per 100 Yen in BAuto’s 2016 numbers. Based on our sensitivity analysis, every 1% drop in the yen will have a positive impact on the group’s 2016 net profit by 5%.”
Not clear roads ahead
Vehicle sales in the first half of 2015 fell 3.3% to 322,184 from 333,156 units in the previous corresponding period, mainly due to subdued business optimism and moderation in consumer spending as a result of the economic uncertainties and increased cost of living.
Stringent lending practices, especially for hire-purchase loans, also had an impact on vehicle sales in the first half of the year.
Some industry observers nevertheless reckon that challenges in the first half will continue into the second half, and affect vehicle sales.
An industry observer believes that the MAA’s optimism of a better second half is more of a hope.
“Historically, vehicle sales tend to perform better in the first six months. A lot of buyers, especially in the second half of the year, rather postpone their purchases to the following year to capitalise on better resale value or newer models.”
BIMB Securities Research, meanwhile, says the slower growth in the first six months of 2015 will likely continue into the second half.
“The softer automotive market is expected to persist, which will put the company’s margins under pressure. Nonetheless, we are maintaining our TIV projection of 650,000 units for 2015 at the moment because of expected moderation in consumer spending due to the slowing domestic economy and increase cost of living.”
Despite expecting a better second half, MAA president Datuk Aishah Ahmad admits that the remainder of the year will be challenging.
“Uncertainties about the Malaysian economy and the impact of other domestic issues are likely to dampen further business optimism. This would affect consumers’ sentiment and subsequently the performance of the local automotive industry.”