Local automotive sector set for high gear

Push factor: Analysts say the extended vehicle sales tax exemption will help sustain the automotive sector’s profitability in 2021.

PETALING JAYA: The local automotive industry, which is already seeing a boost in the form of an extended tax holiday this year, is also set to benefit from stronger economic growth and favourable foreign exchange.

CSG-CIMB said in a report it projected a 45% sector net profit growth in 2021, driven by positive earnings growth from all companies, especially DRB-Hicom Bhd on the back of stronger sales delivery via Proton.

“Moreover, we see upside risk to earnings from the ringgit’s appreciation compared with the dollar and yen, as that will reduce the distributors’ cost of imported completely-knocked-down (CKD) kits and completely-built-up units.

“Among companies under our coverage, DRB-Hicom and UMW Holdings Bhd should benefit the most from the appreciation in ringgit, in our view.”

The research house has reiterated a “neutral” on the local automotive sector.

“The sector trades at 15.1-times 2021 price-to-earnings ratio, in line with the industry’s upcycle mean of 15 times. Hence, we think a stronger earnings recovery is already reflected in its valuation.

“Key upside risks to our ‘neutral’ call are the strengthening of the ringgit against the US dollar and yen, a reduction in interest rates and favourable new policies.

“Ringgit depreciation against the dollar and yen, interest rate hikes and lack of new model launches are key downside risks.”

Under the vehicle sales tax exemption, which was initially announced in June, locally-assembled cars will be exempted from sales tax while for imported cars, the sales tax will be cut from 10% to 5%, until Dec 31,2020.

On Tuesday, the government announced that the tax exemption would be extended until June 30,2021. Under the extension, the sales tax exemption percentage remains unchanged.

CGS-CIMB said it saw the extended sales tax exemption as a positive boost for 2021’s total industry volume (TIV) growth.

“Our existing forecast of 14% year-on-year TIV growth to 570,000 in 2021 had already partially factored in potential extended promotions and new measures by the government to drive the domestic auto sector recovery momentum.

“We also think that the extended sales tax exemption will help sustain the automotive sector’s profitability in 2021, as automakers and distributors would likely have to absorb the sales tax waiver given to customers, in order to honour booking registrations made prior to Dec 31,2020, especially for popular models with longer waiting periods.”

Nevertheless, CGS-CIMB said it still expected national brands, namely Proton and Perodua, to outperform non-national brands, in view of exciting new launches such as the Proton X50 and Perodua’s new A-segment sports-utility vehicle.

“Overall, we expect national brands to register 16% year-on-year volume growth in 2021.

“Among the non-national brands, we expect Japanese marques such as Honda, Toyota, Nissan and Mazda to continue enjoying a higher sales volume delivery, given that these automakers derive over 70% of their sales volume from CKD models, which enjoy the full 100% sales tax exemption.”

Last month, the Malaysian Automotive Association revealed that total vehicle sales continued its year-on-year upward trajectory for the sixth consecutive month in November, rising 7.4% to 56,489 units from 52,584 units in the previous corresponding period.

The pick-up in sales was mainly due to the government’s tax exemptions while aggressive promotional campaigns by automotive companies continued to drive sales.

Despite the year-on-year pick-up in sales, November TIV was 0.3% lower on a month-on-month basis compared with October.

Year-to-date November, the TIV is still far off compared with last year, with total sales standing at 454,708 units compared with 549,439 units in the previous corresponding period.

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