Car prices decline post-GST, analysts hold mixed views

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KUCHING: The reductions of car prices by several automakers as a result of the Goods and Services Tax garnered mixed views by analysts.

The research arm of CIMB Investment Bank Bhd (CIMB Research) in a note viewed the price reduction positively as this would lead to more affordable car prices in the country.

While it was not really surprised by the drop in car prices, CIMB Research had anticipated a smaller reduction due to the different calculation methods between the precedent sales tax rate of 10 per cent and the six per cent GST rate.

“Nonetheless, we do not expect a spike in car sales volume post-GST even with the price reduction, due to a few factors.

“In order to push sales volume, most automakers have been undertaking aggressive promotions, offering discounts and rebates on car purchases since last year until now, with amounts that were substantially larger than the reduction amount due to GST.

“As such, we believe the post-GST price reduction impact will be minimal.

“Furthermore, we believe the increase in prices of other goods and services post-GST will affect the spending power of consumers to the detriment of flailing consumer sentiment, which will have an indirect impact on car sales,” the research firm opined.

CIMB Research maintained its 2015 total industry volume (TIV) forecast at 670,000 units, as it expected consumers to stay cautious and refrain from big ticket item purchases such as a new car.

On the other hand, the research arm of Maybank Investment Bank Bhd (Maybank IB Research) pegged a more neutral view on the price reduction.

It explained, “While this is positive and is expected to boost the rebound in March TIV from a seasonal low base in February, this is not a major kicker for the sector given that price reduction is insignificant to the total cost of owning a car and consumer sentiment is weaker in view of higher cost of living post GST implementation.

“Also, price reductions will be partially offset by GST charges on service and maintenance of the vehicle, spare part replacements, general insurance and petrol (only Ron97).”

It remained neutral on the sector from this new development as the impact from the price reduction would likely to be muted.

On the broader picture, Maybank IB Research remains concerned over auto players with high US dollar-denominated costs and substantial old inventories (which are unsold 2014 vehicles) which would lead to steep discounts to clear the inventories, leading to erosion in margins.

“These are detrimental to auto margins and earnings in the first quarter of 2015,” the research arm commented.

Maybank IB Research’s 2015 TIV forecast of 660 units, which is a decline of one per cent year-on-year remains unchanged.

Its top pick remains with MBM Resources Bhd (MBM) which will benefit from its 22.6 per cent associate stake in Perodua whose recent success in vehicle sales growth and lower cost of production from higher automation at its new plant will translate to stronger earnings contribution.