Health of the real economy is key to market prospects, but factors such as lower interest rate and sales tax exemption will help lower costs and drive up sales

by SHAZNI ONG/ pic by MUHD AMIN NAHARUL

HIGHER automotive sales are expected to bode well for automakers, but the journey to recovery for the sector remains a long way to go, analysts observed.

Proton Holdings Bhd, Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and UMW Holdings Bhd’s UMW Toyota Motor Sdn Bhd saw a pick-up in sales as the industry recuperated from the Movement Control Order (MCO) closure which hit sales.

CGS-CIMB Securities Sdn Bhd analyst Mohd Shanaz Noor Azam expects the sales tax exemption announced by the government on June 5 is helping to drive a sales recovery for the auto sector in the second half of the year (2H20).

“We think it’s too early to judge whether they can meet total industry volume (TIV) expectations at this point, given that we only had one full month (July) of full tax exemption, but our channel checks reveal encouraging recovery in bookings registration and showroom footfall,” he told The Malaysian Reserve (TMR) recently.

The Malaysian Automotive Association (MAA) recently revised up the 2020 TIV forecast from 400,000 to 470,000 in view of stronger demand recovery fuelled by the government’s economic stimulus packages, such as Prihatin Rakyat and the short-term National Economic Recovery Plan (Penjana).

The association had initially forecast TIV of 607,000 units for 2020 in January.

The new revised forecast implies 295,000 TIV or an average of 50,000 per month in the 2H20.

“We think the target is achievable given the implied TIV forecast for the 2H is 24% lower than the average 66,000 per month recorded during the Goods and Services Tax-free period from June to August 2018.

“The upcoming new launches from Proton, Perodua, Honda and Nissan will help accelerate TIV recovery,” Mohd Shanaz added.

Mohd Shanaz expects foreign auto brands to benefit from the sales tax exemption. He said, based on historical data, non-national brands are likely to outperform the national brands during a tax holiday due to higher average savings offered for consumers.

“We expect Japanese and European marques, such as Toyota, Honda, Mazda and BMW, to enjoy higher sales during the sales tax exemption given these players derive over 60% sales volume from completely knocked-down models, which enjoy the full 100% sales tax exemption,” he said.

Mohd Shanaz has Bermaz Auto Bhd as his top pick due to its attractive recovery prospects and its proxy status to the growing popularity of the SUV market given its SUV portfolio and attractive dividend yield.

He also likes Sime Darby Motors Sdn Bhd given its exposure in the premium and luxury segment, which could outperform the national brands during the sales tax holiday.

“We also like DRB-Hicom Bhd as a proxy to Proton’s recovery story,” he said.

Although factors such as lower interest rate and sales tax exemption will help lower costs and drive up sales, the health of the real economy will be key to the market prospects.

“2020 is faced with rising unemployment rate and strict lending requirements from financial institutions as banks are gradually reducing exposure in hire purchase loans, which may limit the volume growth,” Mohd Shanaz said.

JF Apex Securities Bhd analyst Nursuhaiza Hashim was surprised by the strength of sales numbers recorded by the big three brands in July.

“I believe some of the customers, who have been least affected by the Covid-19 pandemic, have taken this opportunity to buy cars during the sales tax exemption period, thus leading to soaring car sales figures,” she told TMR.

She expects the upcoming second-quarter (2Q) results will be under pressure due to lower margins and lockdown imposed by the government.

Nursuhaiza said if sales remain on an uptrend, TIV could hit MAA’s target, perhaps even more.

“I’m sanguine there would be marginal pick-up in sales for auto players like Bermaz, Sime Darby and Tan Chong Motor Holdings Bhd, but will still lag behind Proton and Perodua.

“For MBM Resources Bhd, I think it should benefit from steady sales from Perodua,” she said, and has a ‘Hold’ call on both UMW (target price [TP] of RM2.45) and Tan Chong Motor (TP of RM1).

Nursuhaiza added that the 2020 auto industry outlook is still difficult and advised investors to apply a wait-and-see approach on expectations consumers have on big-ticket items amid the current economic situation, higher unemployment rate and pending the National Automotive Policy 2020 (NAP 2020).

Affin Hwang Investment Bank Bhd analyst Brian Yeoh said the pent-up demand for cars post-MCO was largely within the firm’s expectations.

“Broadly, we expect auto stocks to see lacklustre 2Q earnings as most automotive-related businesses came to a halt during the extended MCO period. Notwithstanding the negative impact of the MCO in the first half of 2020, we believe the cheaper car prices due to the tax exemption, coupled with fresh SUV line-ups should aid recovery in automotive sales in the 2H20,” he told TMR.

A voluntary vehicle end-of-life policy could be a key rerating catalyst he would look out for in the proposed NAP 2020.

“UMW is our sector pick with a TP of RM4.10. We like UMW for the shift in demand to national vehicles (Perodua in particular). Its Toyota franchise also caters to the growing middle-income segment,” he said.

Yeoh said despite the potential of disappointing 2Q results and consensus earnings cuts which may de-rate auto players’ share price, auto stocks are worth revisiting if the current sales momentum is sustained for the rest of the year.