Auto sector faces SST speed bump

Car rally: Demand for cars surged when GST was zero-rated from June 1.

Industry’s outlook remains uncertain as the tax is expected to lift car prices

IT has been a volatile six months for the local automotive industry, with the remaining half looking like it could be just as unpredictable, especially with the reintroduction of the sales and service tax (SST) from Sept 1.

While the Malaysian Automotive Association (MAA) has revised downward its 2018 total industry volume (TIV) forecast in light of the tax system being introduced, some analysts are positive on the outlook of the local automotive industry for this year.

CGSCIMB, which has a “neutral” call on the sector, believes that the introduction of new policies can help bolster the local automotive sector.

“For example, the potential reduction in excise duties on imported cars below 1,600cc, as mentioned in Pakatan Harapan’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 multi-purpose vehicles with an engine capacity of 1,500cc and below incur 60% excise duty,” it says.

At the MAA’s second bi-annual media briefing earlier this week, president Datuk Aishah Ahmad said the association was in talks with the Government on a review of the National Automotive Policy framework.

To this, one industry observer says: “Any new policies that would make buying a car more attractive, such as tax exemptions, would be a welcome move.”

“The zero-rating of the goods and services tax (GST) is proof that with the proper incentives in place, customers are actually ever-ready to spend on cars,” he adds.

TIV dropped for three consecutive months from January to March this year, picking up slightly in April and then dropping again in May, as buyers held back their purchases in light of the uncertainty stemming from the elections that took place that month.

Tax-break boost

However, demand for cars surged immediately when the government announced that there would be a three-month “tax holiday” from June 1 to Aug 31, with GST being zero-rated during the period.

TIV increased 28% to 64,502 units last month, compared with 50,273 units a year earlier, bolstered by the reduction in car prices due to the zero-rated GST (from June 1) and Hari Raya-related campaigns and promotions.

On a month-on-month basis, vehicle sales jumped 50% from 42,983 units in May. In June, total vehicle sales grew to 289,714 units compared with 284,453 units in the previous corresponding period.

June marked a good month for non-national makes, according to analysts.

“The non-national carmakers enjoyed a good run in June, riding on the zero-rated GST prices. Toyota was the star performer in June 2018 – rising more than six times sequentially to 11,700 units – its highest levels since December 2015.

“Mazda, Honda and Nissan also posted sales gains during the month. Meanwhile, continental car sales rose more than two times during this auspicious period too,” says Affin Hwang Capital, which is maintaining an “overweight” call on the local automotive sector.

MIDF Research highlighted that Toyota regained its position as the largest non-national make with a 17.8% market share (overtaking Honda by a tiny margin) for the first time in two years.

“We gather that Toyota currently entails a two-to-three- months waiting list. UMW Toyota has ample capacity to ramp up production at the existing Shah Alam plant by extending working hours and stretching working days into weekends, as well as increase kit supply from Thailand to meet the demand.”

Meanwhile, Mazda was the second strongest performer in June, its TIV almost doubling year-on-year.

“Mazda’s TIV was up 146% month-on-month and grew some 89%year-on-year. Our checks suggest that Mazda has a massive waiting list (especially for the new CX5) which extends into next year,” says MIDF Research.

The research houses says that while official Mazda distributor, Bermaz Auto Bhd (BAuto) has ample production capacity, kits are sourced directly from Japan.

MIDF Research says that there is however the possibility of clawing back some export volumes to meet the temporary spike in domestic demand.

“Mazda’s plants in Hiroshima and Yamaguchi were temporarily impacted by the Japan floods, but had resumed operations last week. BAuto currently has sufficient inventories up till end July. Assuming no further disruption to Mazda Japan’s production, we do not see much impact for August supplies to Malaysia.

“However, given the already long waiting list, we suspect BAuto might selectively extend a tax rebate (or its equivalent) beyond the tax holiday period in order to avoid cancellations if it cannot meet all the bookings by mid-September.”

The surge in demand for non-national makes came at the cost of squeezing the market shares of the national car companies, Proton and Perodua.

“Perodua saw sales volume contract sequentially as sales in May was inflated given a pre-tax holiday GST rebate by Perodua from mid-May 2018. Proton saw a strong 50% month-on-month growth but sales were actually down 15% on a year-on-year basis.

“Overall though, the national cars saw market share contract to 40% as the bulk of the sales growth in June went to the non-nationals,” says MIDF Research.

“Despite the strong surge in Proton sales, its first half 2018 sales of 27,100 still registered a year-on-year decline of 31% due to weak sales in the preceding months,” says Affin Hwang.

“Perodua’s June sales volume contracted by 11% month-on-month to 19,600 units due to a high base effect in May. We think consumers may have temporarily shifted their attention to other alternatives, in view of the long waiting period for Perodua vehicles and to take advantage of the tax holiday window.

“Nonetheless, the strong demand for the Perodua Myvi and other key models has led to a 18% year-on-year increase in Perodua’s first half 2018 sales volume.”

With national makes Proton and Perodua already seeing their numbers being crunched, given the stiff, competitive environment of the local automotive sector, it would not be surprising for industry observers to feel wary of a new national car plan.

Says Aishah: “When we had the first national car, Proton, at the time, our vendor development and engineering expertise was not there and for a period of time, it really helped the industry, especially the support industry; It helped all of this to grow.

“But now, we have Proton and Perodua and the industry is already developed; and other brands are also using the local vendors.”

She notes that other countries in Asean do not have a “national car” of their own.

“If you look at how well Thailand and Indonesia are doing, their industry has really forged ahead. We don’t have economies of scale. Our industry is only 585,000 units, so to have a national car, you need to work with a world class manufacturer – and they must be willing to work and invest in Malaysia.

“For now, we already have more than 500 vendors here to assist and boost the requirements of the auto industry in terms of supply.

“So to me, we don’t need another national car.”

It was reported last month that Prime Minister Tun Dr Mahathir Mohamad was considering launching a new national car, as his brainchild “Proton” was no longer considered a national car after it was sold to China’s Zhejiang Geely Holding Group Co Ltd.

SST implications

With SST taking effect from Sept 1, MAA’s Aishah says it expects car prices to go up, as there will be a 10% tax imposition.

“This is higher than the GST’s 6%. In fact, when the GST was introduced (in 2015), car prices did come down a little.”

She says that it is still early to determine what the quantum would be – when car prices go back up in September.

“It will depend on model-to-model,” she says. “Also, we are still waiting for the technical details; that is whether it will be the same as what was imposed previously.”

CGSCIMB says the Government has yet to finalise the sales tax rate, adding however that the Finance Minister recently announced that there will be two different rates – namely 5% and 10%, 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 the second half of 2018.

“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.”

Aishah notes that customers who would benefit will be those who can get their new cars registered within the tax holiday period, adding that many car manufacturers were struggling to meet the sudden demand surge.

“In terms of producing vehicles, there is always a four-month lead time. You need the local vendors to develop it. We only knew about GST being zero-rated in May, and there’s no way you can increase or request for production to come in or get your vendors to do more.

“We can only sell what is in stock or is already in the pipeline. We cannot get more than that, because of this lead-time period.”

A bottleneck has also surged in loan applications with several banks unable to process the loans on time.

CGS CIMB expects the local automotive sector to deliver higher earnings growth in the second half of this year, driven by stronger TIV growth due to the reduction in GST, new model launches, and recovery in consumer sentiment.

“Nevertheless, we think the strong earnings potential in the second half is already being reflected in the sector valuation, given that the sector currently trades at 17.7-times 2019 price-to-earnings ratio, which is above the last industry upcycle mean of 15-times from 2010 to 2014.

“Key upside risks to our neutral call are the strengthening of the ringgit (compared with the dollar and yen) and introduction of favourable new government policies; depreciation in the ringgit and subdued TIV post SST introduction are key downside risks.”

Affin Hwang is maintaining its 2018 TIV forecast at 582,400 units. The research house believes that the sector’s outlook remains bright on the temporary boost from the cheaper zero-rated GST car prices, strong pick-up in consumer spending, aggressive model launches and sustained strength of the ringgit.

TIV hit an all-time high of 666,674 units in 2015, then dropped almost 15% in 2016 before contracting further last year to 576,635 units.

For 2018, the MAA expects TIV to hit 585,000 units from 590,000 units it had forecast in January.

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