Slow, flat and sluggish — those were the words analysts used to describe the auto sector’s start in 2018, with the Malaysian Automotive Association (MAA) reporting that sales volume in January 2018 was at 44,575 units — 10,154 units lower than the month before.
In fact, the 19 per cent decline in total industry volume (TIV) on a sequential basis was observed by the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) to be normal against an inflated campaign driven December sales.
“Among the major players, the sequential weakness was across the board with the exception of Mazda,” MIDF Research said in a sector outlook.
Aside from the absence of year-end promotional events, the research wing of Kenanga Investment Bank Bhd (Kenanga Research) also attributed the lower monthly car sales to a recovery from the floods.
According to MAA, sales volume in January 2018 was also 0.2 per cent or 92 units lower than 44,667 units recorded during the similar corresponding month in 2017.
“On a y-o-y-basis, TIV flat growth was also due to extra vigour in promotion and launching events last year, while mitigated by the stronger Perodua, Mazda and Nissan sales supported by their all-new Perodua Myvi, all-new Mazda CX-5, and better marketing strategy, respectively,” Kenanga Research said.
Looking at last year’s performance, MAA’s market review for 2017 revealed that the TIV of new motor vehicles registered reached 576,635 units against 580,085 units registered in 2016, a marginal decline of 0.6 per cent.
“Overall sales of new passenger vehicles had been flat. The total registration of passenger vehicles in 2017 was 514,679 units compared to 514,594 units achieved in 2016, thus recording a very small increase of only 85 units or 0.02 per cent.
“However, the total registration for commercial vehicles declined to 61,956 units in 2017 compared to 65,491 units in 2016. This means commercial vehicles sales had declined by 3,535 units or 5.4 per cent.
“As a matter of fact, the decline in TIV 2017 was caused by the poor sales of commercial vehicles,” MAA president Datuk Aishah Ahmad said.
Aishah added that TIV for the fourth quarter of 2017 (4Q17) was the highest, registering a total sales of 150,954 units, whils 1Q17 was the lowest at 140,840 units.
Perodua ‘leading the pack’
Kenanga Research highlighted that Perodua continued to lead the pack with a higher market share at 40 per cent and higher sales growth of 25 per cent y-o-y with the higher deliveries of the all-new Perodua Myvi.
According to Perodua in a press release last month, based on internal estimations, the carmaker’s sales volume of 17,693 units for the month of January 2018 resulted in its highest-ever monthly market share of above 40 per cent, against a total industry volume (TIV) of 43,930 units.
Perodua went on to state that in that month, all models retained their leads in their respective vehicle segments in Malaysia, with 9,029 Myvis, 4,085 Axias, 2,776 Bezzas and 1,803 Alzas sold.
Perodua president and chief executive officer Datuk (Dr) Aminar Rashid Salleh credited the carmaker’s highest monthly market share in January 2018 to “deliveries of the new Myvi, as well as continued strong demand for our other models.”
“The new Myvi has racked up over 48,000 bookings to date.”
Aminar added that in February, close to 20,000 units of the new Myvi had been delivered to date, leading to over a million Myvis been registered in Malaysia since 2005.
Proton records lower market share
As for Proton, Kenanga Research highlighted that the national automaker continued to show depressed volume lacking new models launches to boost volume with a lower sales, which was down 34 per cent y-o-y to 4,783 units in January 2018.
Additionally, Proton recorded a lower market share of 11 per cent, compared to 16 per cent in January 2017. However, market share was higher in January 2018, compared to the previous month of 8.8 per cent market share.
According to Proton, the Saga, Persona and Exora were the most popular models, making up 80 per cent of total car sales for January 2018.
“As the most affordable and value-for-money car in its segment, the Saga remains to be the most popular choice among Proton customers, making up 41 per cent of overall Proton car sales,” vice president of Sales and Marketing Abdul Rashid Musa said.
Despite the drop in market share on a y-o-y-basis, the research arm of Hong Leong Investment Bank Bhd (HLIB Research) believed the strategic partnership with Geely will benefit Proton in the longer term with efforts to restructure and realise synergy, as well as the introduction of new models
from the second half of 2018 (2H18).
“The partner will support Proton’s turnaround, with the injection of funds and technology know-how,” HLIB Research affirmed.
Sale declines from Honda, Toyota
Honda, which led the foreign segment in January 2018, registered slightly lower market share of 18 per cent and reported a lower sales growth of five per cent y-o-y.
Most of the new launches for Honda was registered in the second quarter of 2017 (2Q17) and Kenanga Research believed that consumers held back on purchases in anticipation of new launches in the same time period (expected launch of the face-lifted Honda HR-V).
HLIB Research noted that Honda is targeting 109,000 sales, banking on few launches including facelifted HRV, facelifted Odyssey and new Accord in 2018.
“Progressing further down the list, Toyota saw a significant decline in sales (down 48 per cent y-o-y) with a lower market share of eight per cent due to the termination of ‘RM1 million Bonanza Campaign’ and consumers holding back purchases in anticipation of the all-new Toyota CH-R and all-new Toyota Rush as well as face-lifted variants of its best-selling models of Vios, Hilux and Innova,” Kenanga Research said.
On Toyota, HLIB Research noted that it is targeting sales above 70,000 units in 2018, supported by the upcoming facelift Vios, new C-HR and new Harrier as well as the rumored new Camry.
Nissan has however contrasted to the above two, Kenanga Research pointed out, by showing a positive contribution with a higher sales of 24 per cent y-o-y and slightly higher market share of four per cent with the on-going promotional campaign to clear its outgoing models as a part of its rationalisation strategy to pare down its inventories to a more favourable level of forex exposure.
“Given no new exciting model introduction, Nissan market share has eroded to 4.5 per cent,” HLIB Research said.
“Nissan is expected to launch Nissan Kick, new Serena and hybrid car Leaf EV in 2018.”
Mazda surpassed expecations
Mazda’s performance was even more impressive under the foreign segment.
MIDF Research highlighted that Mazda bucked industry trends and grew by some 62 per cent y-o-y and 83 per cent m-o-m to 1,300 units in January 2018.
The research arm noted that this was close to Mazda’s historical high of 1,300 to 1,400 units per month, excluding the pre-goods and services tax (GST) buying rush in 2015.
According to Kenanga Research, Mazda subsequently registered a higher market share of three per cent, attributed to the higher delivery of its flagship model, the all-new Mazda CX-5, which was held back the previous month due to the higher take-up rate for its premium Soul Red Crystal colour.
“The volume strength was driven by a resumption in purchases of the new CX5 moving into the New Year on top of still strong underlying demand for the model.
“The new CX5 entails more than 900 outstanding bookings, despite an additional RM1,000 hike in price across all variants since January 2018,” MIDF Research said.
Outlook
Going forward, MAA has projected sales volume for February 2018 to be lower than January 2018 as a result of the shorter working month due to the Chinese New Year festive holidays.
For overall 2018, MAA forecasted TIV of 590,000, up 2.3 per cent from last year.
Despite also echoing MAA’s February sentiment of lower sales on a m-o-m basis, HLIB Research maintained its 2018 TIV assumption at 588,100 units.
This was driven by anticipated new model launches, uptrend of consumer sentiment and normalisation impact of bank tighter lending guidelines.
“The sector is expected to be supported by rebounding TIV growth in 2018, with improvement in consumer sentiment and normalising impact from tighten bank guideline.
“While stronger ringgit will improve the industry margins, the higher basic material costs may offset (partially offset) the benefits of ringgit appreciation,” the research arm said.
For 1Q18, Kenanga Research expected overall car sales to slow down with the termination of sales boosting year-end promotional activity.
On its 2018 TIV forecast for the automotive sector, Kenanga Research maintained its estimate of 590,000 units.
Auto’s top sector picks
Kenanga Research
MBM Resources
Kenanga Research liked MBM Resources Bhd (MBM Resources) for the group’s deep value stake in 23.6 per cent-owned Perodua.
Based on the research arm’s FY18 profit forecast and attached 10-fold price earnings ratio (PER) value, MBM’s stake is at circa RM1.1 billion which is 23 per cent higher than the group’s current market capitalization.
Kenanga Research also liked the group for its expected strong turnaround in the alloy-wheel division segment underpinned by the all-new MyVi and expected launch of the all-new Perodua SUV (D38L) and a stronger ringgit.
“The motor trading division will benefit from the strong market reception of the Perodua affordable variants and stronger sales from Volvo premium segment,” Kenanga Research said.
The research arm added that the auto parts manufacturing division is estimated to break even in FY19 with MBM Resources’ alloy wheels plant expected to produce at least circa 73 per cent of the maximum capacity which is at 750,000 units.
Bermaz
As for Bermaz Auto Bhd (Bermaz), Kenanga Research liked the group for its solid earnings recovery with the launching of its flagship model, the all-new Mazda CX-5.
Bermaz’s superior margins appealed to the research arm, given that it is head and shoulders against industry peers (average profit margins of circa eight per cent as compared to peers average at circa two per cent),
Kenanga Research also liked Bermaz for the group’s steady dividend yield of five per cent with its net cash position, which accounts for eight per cent of market capitalisation and strong six per cent free cash flow to equity (FCFE) yield (FY18E).
HLIB Research
DRB-Hicom
Things should be looking up for DRB-Hicom Bhd (DRB-Hicom) this year as HLIB Research noted that with the emergence of Geely as strategic foreign shareholder for Proton, a re-rating catalyst on DRB’s valuation can be expected.
“Following the strategic entry of Geely as Proton’s shareholders, a new chief executive officer (CEO), Li Chunrong was appointed by Geely to spearhead Proton’s restructuring exercise,” the research arm commented.
“Proton dealers and suppliers were brought to China to experience and understand Geely’s operation and products. Dealers are encouraged to upgrade their existing centers into 3S centers, while suppliers were asked to cut prices up to 30 per cent.
“By 2027, Proton is looking to secure 30 per cent market share domestically and 10 per cent of Asean market. Proton aims to sell 400,000 units per annum by 2027, having benchmarked 200,000 units by 2020 and 300,000 units by 2023.”
Meanwhile, HLIB Research pointed out that associate 34 per cent-owned Honda, which is targeting 109,000 units in 2018, continues to lead the foreign market segment with attractive new models (new BRV, Jazz facelift and hybrid, City facelift and hybrid, and new CRV) launched during the year.
Pecca
The management of Pecca Group Bhd (Pecca), a leading automotive leather upholstery player in Malaysia’s original equipment manufacturer (OEM) and pre-delivery inspection (PDI) passenger vehicle segments, has recently guided for car seat sales to improve in the second half of 2018 (2H18).
According to HLIB Research this will be mainly driven by the gradual production ramp up of Perodua’s new MyVi model, which is currently constrained by some of the supplier’s ability to increase production.
The research arm noted that sales outlook of Perodua, which contributed 34.5 per cent of Pecca revenue in financial year 2017 (FY17), looks positive in coming years.
This is on the back of the new line up of Alza facelift and new SUV planned for 2018.
“Furthermore, Perodua is also exploring to expand its export market (leveraging on the new models) over the years,” it said.
Overall, HLIB Research liked Pecca for the group’s stable automotive business prospects as automotive players increase production volume and increase leather programs as well new penetration into aviation business.
MIDF Research
Bermaz
Bermaz remained MIDF Research’s top sector pick, given the group’s entrepreneur driven, highly cash generative asset-light business.
Additionally, the research arm ntoed that Bermaz’s capital expenditure (capex)-intensive manufacturing unit is parked under 30 per cent-owned Mazda Malaysia Sdn Bhd (MMSB) and is kept off-balance sheet.
“MMSB itself is already self-funding,” the research arm said.
MIDF Research highlighted that key catalysts for Bermaz over the next 12 months include an 11 per cent y-o-y Mazda TIV growth (FY19F) coupled with margin expansion driven by full year impact of new CX5 from 3QFY18 onwards.
MIDF Research also highlighted on Bermaz Auto being a key beneficiary of the ringgit strength against the Japanese yen as its imports are 100 per cent exposed to the latter.
“Bermaz is exposed to the Japanese yen via completely built-up (CBU) imports, whereas completely knocked-downs (CKDs) i.e. the CX5 and Mazda 3 models are purchased at a fixed ringgit price from MMSB, which is the importer and assembler of Mazda CKDs.
“To make this possible, MMSB absorbs Japanese yen volatilities from CKD imports; which means that MMSB also benefits from the current ringgit strength,” it said.
The research arm estimated that every one per cent strengthening of the ringgit against the Japanese yen impacts Bermaz’s FY18F (FYE April) earnings by three per cent.
On this, MIDF Research noted that another key catalyst is a more than doubling in associate earnings contribution to group (via MMSB and 29 per cent-owned Inokom) given export market expansion to South East Asia (ex-Vietnam) and re-acceleration in production for the domestic market.
Other key catalysts highlighted by the research arm included the launch of CBU CX8 in 2Q of current year 2018 (2QCY18) and CKD variants in CY19F, along with Bermaz’s attractive dividend yield of seven per cent whereby net cash accounts for 10 per cent of market cap coupled with a solid nine per cent free cash flow to equity (FCFE) yield (FY19F).
“Our payout assumption is capped at 80 per cent versus historical 80 per cent to 113 per cent payout.”
Naza and PSA
Last month saw Groupe PSA (PSA) and Naza Corporation Holdings (Naza) announcing the signing of a share sale agreement and a joint venture agreement, officially establishing shared operation of the Naza Automotive Manufacturing (NAM) plant in Gurun, Kedah, as the first manufacturing hub in Asean for PSA.
Prime Minister Datuk Seri Najib Tun Razak said the partnership would see the introduction of new models with local vendors upgrading their skills, leading to knock-on effects which would benefit the local industries and communities.
He said it would turn NAM into a car manufacturing hub for PSA to expand its presence in the Asean market.
“NAM will become the export hub for regional countries and beyond. The volume of cars NAM is forecast to produce in 2019 is 18,000 units with another 21,000 units in 2020, generating revenues of RM724 million and RM967 million respectively.
“There will be a boost to the economy here as this partnership is expected to lead to the increase in the number of local vendors by 70 over the next five years and create an additional 1,200 jobs in Kedah.”
MIDF Research has estimated that the plant is currently grossly underutilised at well below 40 per cent utilisation rate.
The research arm noted that while Peugeot already had an existing assembly arrangement with NAM, as the plant has been underutilised, deep localisation and advanced manufacturing/assembly requires the transfer of key technologies and processes.
“As such foreign OEMs are usually reluctant to share critical technology unless it attains a controlling stake,” the research arm said.
“Once more advanced manufacturing processes is adopted and deep localisation is achieved, it makes sense for a foreign OEM to make the plant a regional hub.”
MIDF Research further noted that it is a similar case for Bermaz which only owns a 30 per cent stake in its manufacturing unit with the rest controlled by principal, Mazda Corporation.
“Bermaz’s manufacturing unit is now the largest exporter of CBUs out of Malaysia.”