Auto : Marginal TIV growth for auto sector in FY15 expected
Auto sector
Maintain “neutral”: The total industry volume (TIV) figure for the first 10 months of 2014 (10M14) stood at 546,492 units, that is 82% of our 668,000 target for whole of 2014. This implies that the November and December TIV figures would need to average at more than 60,000 units per month or grow +7.8% year-on-year (y-o-y) for our financial year 2014 (FY14) target to be met.
While current sentiment dictates that our 2014 TIV target is likely to be missed, we believe the fairly lacklustre October TIV figure was subject to backlog in deliveries amid the longer processing time for hire purchase (HP) loan approval.
In Bank Negara Malaysia’s recently-released monthly statistics, there was an uptick in HP loan approval rates for October to 57%. This is three percentage points (ppts) above the FY14 run rate of 54% and +6 ppts increase from the 51% loan approval rate in September.
Meanwhile, the October loan disbursement rate eased to 92% from 99% in September. This implies that there could be some delay in vehicle deliveries which supports our argument of strong TIV figures in the last two months of the year.
For FY15, we expect a marginal TIV growth of +0.3% y-o-y to 670,000 units. The easing growth compared to prior years largely reflects the potential impact on disposable income under the new consumption tax and subsidy structure. We are not expecting a contraction in TIV given that Malaysia’s economic outlook is still positive with gross domestic product growth expected to be in the range of between 5% and 6% for FY15.
We also expect the demand for new vehicles to be decent on full-year contribution from key models launched in FY14 such as the Perodua Axia, Proton Iriz, Mazda 3, Nissan Sylphy, Nissan Teana, Toyota Altis, Honda City and Honda Jazz, to name a few. In addition, we expect buying interest to sustain with new model launches in FY15 such as: i) passenger cars — Perodua Myvi facelift, Mazda 2, Mazda 3 CKD, and Mazda 6 CKD; and ii) SUV/4WD — Nissan X-Trail, Honda HR-V, Mazda CX-3, Nissan Navara, Mitsubishi Triton, Toyota Vios facelift, Toyota Hilux, Toyota Innova, Toyota Fortuner and Toyota Camry facelift.
We believe there could be some respite in consumer confidence lending support from the lower fuel pump price and relatively stable fiscal health of the country. Recently, Tan Sri Dr Zeti Akhtar Aziz, the central bank governor, remarked that the depressed crude oil price is a positive development as cost of businesses could be reduced and it may also limit inflationary risk pressures. We also believe that discretionary spending could improve thus enhancing goods and services tax collection.
Moreover, the recent removal of the fuel subsidy gave some anecdotal evidence of the still healthy purchasing power as some consumers took the opportunity to opt for the higher fuel grade RON97 as the price gap with the lower grade RON95 narrowed.
The US dollar-to-ringgit (US dollar/RM) rate spiked to as high as RM3.45 recently due to concerns about Malaysia’s fiscal health going into 2015 amid the depressed crude oil price which was affirmed by Petroliam Nasional Bhd’s dim profit outlook for FY15. We estimate that every 1% change in US dollar/RM rate impacts the earnings of automotive companies under our coverage by 2% to 5%.
On the flipside, the depressed yen is positive for some of the companies under our coverage.
Possible mitigating step. The government could bring forth its subsidy rationalisation plan even further, particularly in the power sector, hence mitigating the impact from lower petroleum-derived revenues. This may also lend support to the ringgit which is at risk of being depressed against the US dollar should the US Federal Reserve raise interest rates in FY15.
By and large, the auto sector has underperformed the FBM KLCI since the start of 2014. Tan Chong Motors Holdings Bhd has been the worst performing stock, lagging the KLCI by 37%, amid Nissan’s declining market share which eroded earnings while concerns about its prospects remain. While UMW Holdings Bhd and MBM Resources Bhd have performed relatively better compared with Tan Chong Motors, these stocks have lagged the index by 3% and 9% respectively.
Markets continued to ignore the positives. We believe sentiment towards the sector remains poor due to growing concerns about the industry’s prospects in FY15. Unfortunately, this has permeated to select stocks such as UMW Holdings and MBM Resources which are largely less affected by the strengthening of the dollar. MBM Resources is our sector top pick.
Specifically on MBM Resources, the stock has remained depressed despite the collapse in yen and encouraging sales of the new Perodua Axia — both factors should translate into a strong rebound in Perodua’s earnings going forward. We nominate MBM as our stock top pick for the sector as we also expect its manufacturing businesses to see lower losses in FY15 as capacity at its alloy-wheel plant is ramped up and contribution from its vehicle trading business strengthens further.
While we believe that earnings risks are largely priced in, we remain “neutral” on the sector. Within our coverage, we retain our “buy” rating on MBM Resources and “neutral” on UMW Holdings while we recently downgraded Tan Chong Motors to “neutral”.
We also introduce our FY15 TIV target of 670,000 units which implies a +0.3% y-o-y growth from 668,000 units for FY14 forecast.—MIDF Research, Dec 9
http://www.theedgemarkets.com
Auto sector
Maintain “neutral”: The total industry volume (TIV) figure for the first 10 months of 2014 (10M14) stood at 546,492 units, that is 82% of our 668,000 target for whole of 2014. This implies that the November and December TIV figures would need to average at more than 60,000 units per month or grow +7.8% year-on-year (y-o-y) for our financial year 2014 (FY14) target to be met.
While current sentiment dictates that our 2014 TIV target is likely to be missed, we believe the fairly lacklustre October TIV figure was subject to backlog in deliveries amid the longer processing time for hire purchase (HP) loan approval.
In Bank Negara Malaysia’s recently-released monthly statistics, there was an uptick in HP loan approval rates for October to 57%. This is three percentage points (ppts) above the FY14 run rate of 54% and +6 ppts increase from the 51% loan approval rate in September.
Meanwhile, the October loan disbursement rate eased to 92% from 99% in September. This implies that there could be some delay in vehicle deliveries which supports our argument of strong TIV figures in the last two months of the year.
For FY15, we expect a marginal TIV growth of +0.3% y-o-y to 670,000 units. The easing growth compared to prior years largely reflects the potential impact on disposable income under the new consumption tax and subsidy structure. We are not expecting a contraction in TIV given that Malaysia’s economic outlook is still positive with gross domestic product growth expected to be in the range of between 5% and 6% for FY15.
We also expect the demand for new vehicles to be decent on full-year contribution from key models launched in FY14 such as the Perodua Axia, Proton Iriz, Mazda 3, Nissan Sylphy, Nissan Teana, Toyota Altis, Honda City and Honda Jazz, to name a few. In addition, we expect buying interest to sustain with new model launches in FY15 such as: i) passenger cars — Perodua Myvi facelift, Mazda 2, Mazda 3 CKD, and Mazda 6 CKD; and ii) SUV/4WD — Nissan X-Trail, Honda HR-V, Mazda CX-3, Nissan Navara, Mitsubishi Triton, Toyota Vios facelift, Toyota Hilux, Toyota Innova, Toyota Fortuner and Toyota Camry facelift.
We believe there could be some respite in consumer confidence lending support from the lower fuel pump price and relatively stable fiscal health of the country. Recently, Tan Sri Dr Zeti Akhtar Aziz, the central bank governor, remarked that the depressed crude oil price is a positive development as cost of businesses could be reduced and it may also limit inflationary risk pressures. We also believe that discretionary spending could improve thus enhancing goods and services tax collection.
Moreover, the recent removal of the fuel subsidy gave some anecdotal evidence of the still healthy purchasing power as some consumers took the opportunity to opt for the higher fuel grade RON97 as the price gap with the lower grade RON95 narrowed.
The US dollar-to-ringgit (US dollar/RM) rate spiked to as high as RM3.45 recently due to concerns about Malaysia’s fiscal health going into 2015 amid the depressed crude oil price which was affirmed by Petroliam Nasional Bhd’s dim profit outlook for FY15. We estimate that every 1% change in US dollar/RM rate impacts the earnings of automotive companies under our coverage by 2% to 5%.
On the flipside, the depressed yen is positive for some of the companies under our coverage.
Possible mitigating step. The government could bring forth its subsidy rationalisation plan even further, particularly in the power sector, hence mitigating the impact from lower petroleum-derived revenues. This may also lend support to the ringgit which is at risk of being depressed against the US dollar should the US Federal Reserve raise interest rates in FY15.
By and large, the auto sector has underperformed the FBM KLCI since the start of 2014. Tan Chong Motors Holdings Bhd has been the worst performing stock, lagging the KLCI by 37%, amid Nissan’s declining market share which eroded earnings while concerns about its prospects remain. While UMW Holdings Bhd and MBM Resources Bhd have performed relatively better compared with Tan Chong Motors, these stocks have lagged the index by 3% and 9% respectively.
Markets continued to ignore the positives. We believe sentiment towards the sector remains poor due to growing concerns about the industry’s prospects in FY15. Unfortunately, this has permeated to select stocks such as UMW Holdings and MBM Resources which are largely less affected by the strengthening of the dollar. MBM Resources is our sector top pick.
Specifically on MBM Resources, the stock has remained depressed despite the collapse in yen and encouraging sales of the new Perodua Axia — both factors should translate into a strong rebound in Perodua’s earnings going forward. We nominate MBM as our stock top pick for the sector as we also expect its manufacturing businesses to see lower losses in FY15 as capacity at its alloy-wheel plant is ramped up and contribution from its vehicle trading business strengthens further.
While we believe that earnings risks are largely priced in, we remain “neutral” on the sector. Within our coverage, we retain our “buy” rating on MBM Resources and “neutral” on UMW Holdings while we recently downgraded Tan Chong Motors to “neutral”.
We also introduce our FY15 TIV target of 670,000 units which implies a +0.3% y-o-y growth from 668,000 units for FY14 forecast.—MIDF Research, Dec 9
http://www.theedgemarkets.com
