CIMB Research retains underweight on auto sector, DRB-Hicom top pick

KUALA LUMPUR: CIMB Equities Research is maintaining its Underweight call on the automotive sector given the persistent weakness in consumer sentiment and potential margin erosion from higher operating expenditure and intense competition. 

It said on Wednesday the sector trades at 1.1 times CY18F price-to-book value (P/BV), in line with its three-year mean.

“DRB-Hicom is our top pick, premised on the narrowing losses at Proton with Geely’s entry as a foreign strategic partner and earnings diversification in e-commerce,” it said.

CIMB Research sees the strengthening of the ringgit versus US$ and yen as positive for the automotive sector as it will help automakers reduce the cost of imported complete knocked-down (CKD) kits and complete built-up (CBU) units. 

Tan Chong and UMW Holdings are winners of the ringgit's appreciation against US$ given that 50% of their total manufacturing costs are denominated in US$. 

Bermaz will also benefit from the appreciation of the ringgit given that 30% of its total cost of sales is denominated in yen.

Total industry volume (TIV) grew 4.6% on-month to 49,184 units in November 2017 due to stronger sales from both passenger vehicles (PV) and commercial vehicle (CV) segments. 

The Malaysian Automotive Association (MAA) attributed the higher sales to year-end festive sales promotions. 

The MAA expects sales in December to improve on-month due to new model launches and aggressive year-end promotional campaigns. 

TIV for January-November rose 1.3% on-year to 521,940 units, driven by higher passenger vehicle sales of both national and foreign brands, which rose 1.4% and 3.0% on-year respectively. 

The growth came from various new model launches from both national and foreign brands. In addition, the stronger passenger vehicle sales were in line with the higher passenger car loan approvals, which increased 1.7% year-to-date. 

Overall, 11M17 TIV made up 88% of CIMB Research’s full-year TIV forecast of 597,000 units.  

Despite the improving TIV sales, the MAA said total vehicle production volume fell 6.7% on-year to 463,993 units in January-November. 

The MAA attributed the lower production to the cautious stance taken by the automakers, and inventory adjustments amid soft market environment. 

“We reduce our full-year TIV assumption marginally from 3% to 2% growth in 2017 in view of sluggish consumer sentiment and weaker-than-expected CV sales. However, we expect higher on-month sales volumes in December, driven by seasonally stronger demand due to wider discounts as dealers try to reduce their inventories ahead of the New Year. 

“Moreover, we believe the recently-launched Perodua Myvi will also help to boost TIV sales as we gather the model received over 15,000 bookings within two weeks of launch,” said CIMB Research.