Near-term headwinds put the brakes on auto sector recovery

Supply chain issues are expected to plague the recovery in the 2Q21, especially for volume models, says analyst

by NUR HAZIQAH A MALEK / Pic credit: simedarby.com

NEAR-TERM headwinds are anticipated to stay for the auto and auto parts sector, slowing down the recovery amid ongoing semiconductor chip supplies disruption.

RHB Investment Bank Bhd (RHB Research) analyst Eddy Do Wey Qing stated that supply chain issues are expected to plague the recovery in the second half of the year (2Q21), especially for volume models and could directly impact sales volumes.

He said this is despite automakers ramping up production to cater for order backlogs.

“The June quarter was generally weak following the government’s re-imposition of full lockdown measures that put the brakes on the industry’s recovery.

“Out of the four stocks we cover, Bermaz Auto Bhd (BAuto), MBM Resources Bhd and UMW Holdings Bhd saw downward revisions in earnings prior to the results to factor in the halt in activities,” Do wrote in a research report on Wednesday.

He noted that UMW missed expectations as the group made losses in the 2Q21. Subsequently, it saw another round of postresults earnings cuts.

Do expects Sime Darby Bhd to beat expectations with a stellar performance on strong demand for BMW vehicles in China.

Automakers have indicated their supply chains are likely to be intact at least for the next one to two months.

RHB Research downgraded MBM and BAuto to ‘Neutral’ during the quarter.

The investment bank remained ‘Neutral’ on the sector, with its top pick remaining Sime Darby for its exposure to the regional markets and comparatively more robust recovery outlook.

RHB maintained its total industry volume (TIV) forecast for the financial year 2021 at 500,000 units, a 5.6% year-onyear decrease, in line with the Malaysian Automotive Association’s (MAA) estimate.

With easing lockdown measures and key states moving into National Recovery Plan Phase 2, RHB Research expects a bumper sale in September.

Do noted that test drives of vehicles are now allowed for states under Phase 2 as per the latest standard operating procedure.

In addition, he stated latest conversations with management teams suggested MAA has appealed for a Sales and Service Tax (SST) exemption to continue beyond December, likely for another six months.

“Contrary to market expectations, we think any further extension in SST exemptions beyond December will lose its effectiveness, as consumers intending to take advantage of the discount will have already done so.

“Beyond that, we expect TIV to taper off for a few quarters following the SST re-imposition before resuming growth,” he said.

The analyst noted that downside risks include tightening of bank approvals for car financing, sharp weakening of the ringgit, slower than expected normalisation in demand post-SST exemption at end-2021, sustained disruptions in semiconductor chip supplies, further Covid-19 spikes and subsequent rolling lockdowns.

Upside risks are represented by the opposite of the outlined downside risks.

Year-to-date, national marques accounted for 61% of the local automotive market share, with Proton Holdings Bhd at 22.7% and Perusahaan Otomobil Kedua Sdn Bhd at 38.2%, according to companies and RHB Research’s data.

Toyota clinched a 13.9% market share, Honda (10%), Nissan (2.5%), Mazda (2.2%) and others (10.5%).