October auto sales were flattish at -0.6% mom, but declined 14.1% yoy to 47,879 units due to the high base in Oct 15 as consumers front-loaded purchases ahead of price hikes. We cut our 2016 TIV forecast to 570,000 units (-14.5% yoy) from 615,000 units. Maintain UNDERWEIGHT. Bermaz Auto is our top pick. Its FY17 yield is attractive at 6% (based on 80% payout) and could go up to 7.5% (based on 100%payout), given that it is cash rich with no debt.
• Going slow. Auto sales in October were flattish at -0.6% mom, but declined 14.1% yoy to 47,879 units due to a high base in Oct 15 as consumers brought forward their purchases ahead of the price hikes effective 1 Jan 16. The Malaysian Automotive Association (MAA) expects November sales volume to be slightly better than October’s on the back of the continuation of aggressive year-end sales and promotions by carmakers. 10M16 total industry volume (TIV) declined 13.8% yoy to 466,324 units.
• National segment sales volume for October rose 2.1% mom. Proton’s 26% mom increase in sales volume was mitigated by a 5.8% mom decline in Perodua’s sales volume. Proton’s strong mom performance came from its new Proton Persona (sedan version of Iriz hatchback) which was launched in late-August and the all-new Proton Saga which was launched in late-September. Proton’s upcoming launch will be a 7- seater compact multi-purpose vehicle (MPV), which is a rebadged version of Suzuki Ertiga which will be launched by end-16. In 10M16, both Perodua and Proton saw their sales volumes decline 4.5% and 33.5% yoy respectively.
• The non-national vehicle segment’s sales volume declined 3.3% mom and 21.5% yoy to 23,475 units in Oct 16. All major Japanese marques (except Honda) saw mom and yoy declines:
a) Toyota sales volume dipped 3.2% mom and 38.9% yoy to 5,500 units. 10M16 sales volume was down 29.6% yoy to 50,020 units due to front-loading by consumers ahead of price hikes by Toyota effective 1 Jan 16. Meanwhile, we expect Toyota to fare better in November, thanks to its all-new Vios which was launched in early- October. Prices of the new Vios are lower than its predecessor’s by RM1,480-3,680 and it comes with five years of free servicing for purchases made before end-16.
b) Honda sales volume rose 9.4% mom but fell 3.5% yoy to 8,204 units. 10M16 sales volume declined 4.6% yoy to 71,466 units, surpassing that of Proton’s 57,731 units.
c) Nissan sales volume dropped 19.5% mom and declined by a higher 33.4% yoy to 2,454 units. 10M16 sales volume dropped 14.6% yoy to 32,852 units. d) Mazda sales volume dipped 1.6% mom but dropped 21.1% yoy to 1,004 units. 10M16 sales volume was down 4.9% yoy.
• We cut our 2016 TIV forecast to 570,000 units (from 615,000 units), down 14.5% yoy. Given the lacklustre sales thus far and the still-soft consumer sentiment, we opine that 2016 TIV may not hit MAA’s forecast of 580,000 units. Our 2017 TIV forecast stands at 580,000 units (+2% yoy).
• Yield play on Bermaz Auto. Despite soft 1QFY17 results, Bermaz Auto’s earnings remained more resilient than listed auto peers’ due to its low base and zero debt position. We see BJ Auto as a yield play for now with its yield of 6.0% for FY17 (based on an estimated 80% dividend payout). We see possibility of a higher-than- expected payout given its cash-rich with zero debt position, as well as a potential special dividend from its capital gains due to the listing of its 60.4%-owned Berjaya Auto Philippines in 1Q17. We also take the opportunity to highlight that our FY17 EPS forecast of 15.6 sen (-9.6% yoy) is lower vs consensus forecast of 17.3 sen. Assuming a 100% payout for FY17, yield could go up to 7.5%.
• Maintain UNDERWEIGHT on the sector as we expect the operating environment to remain challenging in the near and mid-term. Sales volume will remain depressed due to still-soft consumer spending. More aggressive promotions driven by stiff competition coupled with high input costs due to the prolonged ringgit weakness against major currencies will continue to crimp margins. We remain negative on UMW Holdings as all of its major divisions are operating in challenging environments. In addition, its earnings will continue to be dragged down by its loss-making 55.7%-owned UMW Oil & Gas with only two rigs (out of eight rigs) working at depressed chartered rates.
source: UOBKayHian Research– 21/11/16