Kenanga maintains outperform call on auto sector

Auto sector
Maintain outperform: Total industry volume (TIV) up to June of 300,973 units accounted for 54.7% and 55.1% of MAA’s and our forecast of 550,000 units and 546,000 units respectively. The TIV surged by 6.2% month-on-month (m-o-m). We believe this rise is being attributed to buyers rushing to take delivery of the units prior to the interest rate hike. The growth of 19.5% year-on-year (y-o-y) is coming from a low base effect and has been the result of improving economic conditions leading to positive market sentiments.

The national brands continue to dominate the market with a collective share of 57.2%. Both Perodua and Proton recorded an increase in sales of 8.2% and 3.6%, respectively. Perodua continues to take the lead with a market share of 30.1%, attributed to higher sales of all main models. Proton saw its share grow moderately to 27.1%, attributed to the higher sales of its main models, Proton Saga and Persona.

Toyota saw its sales decrease by 3.3% m-o-m from 8,156 units to 7,888 units due to lower sales of all its main models. Honda’s sales increased by 34.3% m-o-m supported by the Honda CRV, Freed, City and Civic. Nissan’s market share stood at 5.5% while it registered a 3.8% growth m-o-m to 2,960 units.

The auto industry is seeing the kind of optimism not seen since 2005. We believe the TIV will exceed our initial forecast of 546,000 units as consumer and business confidence improve. We are therefore revising upwards our FY2010 TIV forecast to 568,000 units from 546,000 units originally, attributable to commendable sales performance in 1H2010. However, we anticipate TIV for 2H2010 to normalise as 2H is expected to be seasonally slow.

The increase in interest rate and fuel subsidy cuts are unlikely to have significant impact on auto sales. The petrol hike is beneficial for the national segments and manufacturers that produce smaller capacity vehicles, and will create a market for more fuel-efficient vehicles. As markets are what manufacturers respond to, we expect kilometre per litre will eventually become an important feature. Thus, demand for vehicles such as Toyota Vios (UMW), Honda City and Nissan Latio (Tan Chong) will grow.

Maintain outperform on the automotive sector. Auto companies should report commendable earnings in 2Q2010 results given the sustained strong sales momentum. Favourable currency movements and a stronger ringgit against the US dollar and yen is also expected to lend some comfort to margins. Buy on Tan Chong and MBM, trading buy on Proton and hold on UMW. — Kenanga Investment Bank Bhd Research, July 21


This article appeared in The Edge Financial Daily, July 22, 2010.