Pakatan's pledges may alter market share
KUALA LUMPUR: CIMB Equities Research expects the sector to deliver higher earnings growth in 2H18F, driven by stronger total industry volume (TIV) growth.
It said on Friday the TIV growth was due to the zerorisation in the Goods and Services Tax (GST) on June 1, new model launches, and recovery in consumer sentiment.
“Nevertheless, we think the strong earnings potential in 2018F is already being reflected in the sector valuation, given that the sector currently trades at 17.7 times CY19F P/E, which is above the last industry upcycle mean of 15 times over 2010 to 2014,” it said.
CIMB Research retained its neutral outlook on the sector with DRB-Hicom as its top pick.
It said the key upside risks to its neutral call were the strengthening of the ringgit versus the US$ and Japanese yen and introduction of favourable new government policies.
However, a depreciation in ringgit vs. US$ and yen, and subdued TIV post sales and service tax (SST) introduction on Sept 1 are key downside risks.
On Thursday, the Customs Department issued a statement to clarify reports on new vehicles sales being exempted from the new SST regime.
The Customs Department highlighted that the completely knocked down (CKD) components used in a vehicle assembly will be exempted from the proposed SST, but once the vehicle assembled from the imported CKD components is completed, it will be subjected to the SST starting Sept 1.
CIMB Research said currently, consumers are enjoying a relatively lower new vehicle selling prices due to the tax holiday period announced by the Pakatan Harapan (PH) government in June.
This explained the surge in TIV growth in June, up 50% on-month. The Malaysian Automotive Association (MAA) expects July sales volume to stay flattish on-month as consumers continue to take advantage of the tax holiday ahead of the SST in September.
“Nevertheless, we expect the selling prices for new vehicles to increase following the implementation of SST.
The government has yet to finalise the sales tax rate, but the Finance Minister recently announced that there will be two different rates of 5% and 10% for sales tax, to be imposed on selected manufactured and imported products.
“We think if the sales tax is fixed at 5%, consumers may still enjoy relatively lower new vehicle selling prices compared to the previous GST structure. This could still support healthy TIV growth in 2H18F.
“However, we see downside risks to TIV, if the sales tax is fixed at 10% because this could lead to higher new vehicle selling prices compared to during the GST regime.
“Despite the potential risk to TIV from higher sales tax rate introduction, we believe potential new policies to be introduced by the PH government could revive Malaysian TIV growth beyond 2018F.
“For example, the potential reduction in excise duties on imported cars below 1,600cc as mentioned in PH’s manifesto could drive up TIV growth. Currently, all passenger cars with an engine capacity of 1,800cc and below are subjected to 75% excise duty, while MPVs with an engine capacity of 1,500cc and below incur 60% excise duty,” it said.
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