Auto players hit speed bump
Ho Chung Teng 
The stronger ringgit, improving GDP, new mass-market models and a lower base in 2016 should have boosted last year’s TIV, but it fell 0.59% to 576,635 units from 580,635 units a year ago

Local automotive players, especially those in the luxury car segment, posted record sales last year, amid global excitement over a number of key pilot projects like autonomous driving and digitisation.

Riding on the back of gradually improving consumer sentiment, the companies are expected to report slightly better total industry volume (TIV) sales this year.

The positive developments and better investors’ sentiment led to the resurgence of many auto stocks, led by DRB-Hicom Bhd whose share price rose 40.98% to RM2.58 on Jan 25 from RM1.83 on Dec 29 last year.

However, not all were as fortunate. Cycle & Carriage Bintang Bhd, distributor of Mercedes Benz, saw its share price dip 1.38% to RM2.15 on Jan 25 from RM2.18 on Dec 29 last year.

Despite the optimism, many believe the auto players are not out of the woods yet and may be in for a bumpier ride.

This is largely due to Bank Negara Malaysia’s recent move to raise the overnight policy rate by 25 basis points to 3.25%. As it is, the TIV growth has been partly dampened by stringent loan requirements.

In addition, the global economy could undergo an economic downturn based on the 10-year cycle. The last financial crisis occurred in 2008 which saw banks crumble, credit freeze up and economies go into a free fall.

While some expect lower TIV growth this year due to limited catalysts, such as lack of new models or positive automotive policies, others see a recovery backed by improving sentiment and a stronger economic growth.

Dushyant expects a 2% TIV growth this year

Frost & Sullivan Asia-Pacific senior director of mobility Dushyant Sinha says the TIV has generally experienced an average growth of 1.9% over the past five years, with demand reaching saturation level.


He expects a 2% growth this year, highlighting launches of popular models, such as Perodua Myvi as well as Honda’s BR-V and CR-V, to remain key drivers.

“We are expecting good sales momentum for key models that were launched in 2017. With anticipation of additional push from 2018 key models, namely, Toyota C-HR and Proton’s new SUV (sports utility vehicle), it is likely the growth of 2% can be achieved,” Dushyant tells FocusM.

The momentum is further supported by the domestic economy which is projected to grow at over 5% in 2018, driven by favourable external and domestic factors, as well as better consumer sentiment.

Dushyant says government and private spending is also forecasted to be higher, acting as key catalysts in driving the economy.

“These factors are likely to be additional drivers boosting the 2018 TIV,” he adds.

December TIV grew 11.3% month-on-month to 54,700 units driven by year-end promotional activities and rebates. However, sales fell 15.6% year-on-year (yoy), dragged by lower sales of Perodua, Proton and Nissan. Overall, last year’s TIV fell marginally by 0.6% yoy to 576,635 units from 580,635 units.

Analysts are generally surprised with last year’s poorer TIV sales because the performance for the first 11 months was better than the previous corresponding period. TIV sales rose 1.28% to 521,907 units in the January -November period versus 515,293 units a year ago.

However, December sales fell 15.58% or 10,104 units to 54,729 units from 64,833 units in the previous corresponding period. Malaysia Automotive Association attributes the lower December TIV to floods in certain states in Peninsular Malaysia.

Nevertheless, iFast Capital Sdn Bhd research analyst Jerry Lee says TIV growth is achievable in 2018. He believes the auto sector has turned around last year, as TIV for January to November improved 1.3%, after almost two years of contraction due to the implementation of the Goods and Services Tax and the weak ringgit.

However, the ringgit has since strengthened to RM3.89 against the US dollar on Jan 25, from RM4.43 a year ago.

“Moving into 2018, we see several factors that could probably boost the industry volume for the auto sector such as the strengthening ringgit, loosening lending standard and the recovering consumer sentiment,” he says.

Maybank Investment Bank analyst Ivan Yap attributes the lower December TIV to lukewarm response in the auto players’ year-end sales campaigns, with Perodua facing supply constraints for its 1.5 litre Myvi variants which contributed 85% of the second national automaker’s 36,000 bookings as of mid-January 2018.

“Perodua expected only 55% of buyers to opt for the 1.5 litre variants. Nevertheless, this pleasant headache should pave the way for stronger TIV in Q1 2018,” he explains.

He adds that Mazda, which was forecasted to boost December TIV with its latest model offering, CX-5, announced a sales decline of 29.6% to 711 units from 1,010 units in November 2017. This was due mainly to lack of price discounts for the new CX-5, making it less attractive than other models which offered heavy discounts.

Perusahaan Otomobil Kedua Sdn Bhd (Perodua) president and CEO Datuk Aminah Rashid Salleh is pleasantly surprised with the overwhelming response to its bigger engine and better-equipped Myvi 1.5 litre. “It’s a problem, but a good one. We’re working almost every day, overtime and on alternate Saturdays,” he reportedly said.

Perodua’s ratio of orders is 85% for the 1.5 litre variant and 15% for the 1.3 litre model, unchanged from earlier this year. Demand is skewed heavily towards the more expensive model, and this is something Perodua did not expect. It projected a 55:45 ratio and is working hard to meet delivery of the 1.5 litre variant.

Another analyst attributes the lower TIV sales to consumers holding back bulk purchases with the impending general election.

“Historically, consumers will adopt a wait-and-see approach when general elections are nearing. However, this time around, it seems to be a lot weaker than usual,” he says.


Year of growth

For this year, analysts and industry players expect TIV sales to hit 610,000 units, despite economic uncertainties.

UMW Toyota Sdn Bhd president Ravindran Kurusamy had said he foresees 2018 to be a challenging year due to weak market sentiment on hire purchase.

Ravindran foresees 2018 to be a challenging year due to weak market sentiment on hire purchase

“Nevertheless, we believe the economy is recovering slowly, and new vehicle TIV is expected to break through 600,000 units. While we look at the long term, it is still tough trying to maintain prices when costs keep going up,” he said.

Hong Leong Investment Bank analyst Daniel Wong expects TIV to increase 1.98% to 588,100 units this year, drive mainly by new model launches and normalisation impact of tighter lending guidelines by banks.

Meanwhile, Maybank’s Yap says automakers had taken the necessary precautionary measures to limit their 2017-manufactured inventories to avoid heavy discounting this year.

“Going forward, we expect January and February 2018 total industry production to recover slightly, but still capped by the unsold 2017 inventories and shorter working period due to concentration of public holidays in those two months,” he adds. He expects this year’s TIV to grow 5.78% to 610,000 units.

Sales of passenger vehicles, excluding those by national automakers Proton and Perodua, appear to correlate with gross domestic product growth (GDP) (see graph).

GDP vs automotive (excluding Proton and Perodua) sales growth

An analyst says while GDP is not a perfect indicator to suggest consumer spending on vehicles, he believes that up to a certain level, a positive GDP growth will significantly boost consumer sentiment.

According to Bank Negara, the domestic economy grew at a faster pace of 6.2% in the third quarter of 2017, against 4.3% a year ago, while private consumption registered its strongest performance since 2015 with a 7.2% growth.


NAP 2014 supported TIV sales

Frost & Sullivan’s Dushyant says the introduction of energy-efficient vehicles (EEVs) with provision for fiscal incentive will help reduce excise duty and make the retail price more affordable under the National Automotive Policy (NAP) 2014.

“This became the impetus for sustaining TIV in 2014 and beyond. From our observation, OEMs (original equipment manufacturers) will continue to produce models with EEV status to ensure prices are competitive and affordable to the public,” he explains.

Minister of International Trade and Industry (Miti) Datuk Seri Mustapa Mohamed had said NAP 2018 is still in the works and will be announced by mid-2018.

Industry players say the main pillars of NAP 2018 will likely focus mainly on connectivity, mobility, next-generation vehicles, big data and lifestyle.

One player says initial targets include the commitment of localisation value of RM15 bil and investments of RM3.99 bil.

Between 2014 and 2017, the committed localisation value was RM43.67 bil with realised investment at RM7.6 bil.

The current NAP, which was announced in 2014, focuses mainly on EEVs. According to Miti, the EEV penetration rate
increased for the fourth straight year in 2017, reaching 52% of vehicles sold in the country. This is 2% higher than the target set and an increase of nearly 10% from 2016. The adoption rate is expected to hit 60% or 350,000 units this year.

Dushyant says NAP 2018 will be a game changer to the local automotive industry as the policy is expected to drive smart mobility initiatives, which are aligned to the global landscape.

“NAP 2018 will focus on new trends in mobility such as connected cars and next-gen mobility. We believe these are the government’s latest initiatives to ensure the local industry stays significant and relevant with global trends.

“From our perspective, NAP 2018 will focus not only on driving sales but also on helping the local automotive industry stay competitive with key markets in the region. The shift is critical to attract new investments as well as maintaining existing investments,” he adds.

An analyst says NAP 2014, which comes with tax incentive, saw automakers reducing vehicle prices leading to a migration of consumer spending pattern, with the middle-class segment most affected.

iFast’s Lee says under NAP 2014, the sector has performed relatively well in terms of EEV penetration, recording a rate of more than 50% which is set by the government.

“In fact, this is part of NAP 2014, which aims to make Malaysia a regional automotive hub in EEV,” he adds.

Lee hopes NAP 2018 will include more incentives and new value propositions for auto players to introduce new models and higher quality EEVs.

“On top of that, we expect the government to promote strategic partnership between local car players with international players, especially on the technology front in order to increase their competitiveness in terms of pricing and quality.”

Auto counters stage share price rally

The shares prices of most automotive counters rallied in the past month. Diversified group DRB-Hicom Bhd topped the list of auto players (excluding vendors) with the highest gain of 40.98%, closing at RM2.58 on Jan 25 from RM1.83 on Dec 29 last year.

However, the counter fell 5.9% on Jan 24 after its subsidiary Proton Holdings Bhd terminated its partnership with Lotus Group International Ltd and Goldstar Heavy Industrial Co Ltd. It closed at RM2.60 on Jan 30.

The joint venture (JV) was to sell and produce Lotus branded vehicles, components, parts and accessories in China. However, the JV, which had not started operations, was aborted due to delays in obtaining a manufacturing licence.

The only loser in the stock rally was premium automotive distributor Cycle & Carriage Bintang Bhd whose share price dipped 1.38% to RM2.15 on Jan 25 from RM2.18 on Dec 29 last year.

While most fund managers attribute the rally to the upcoming general election (GE14), William Capital Plt chief investment officer William Ng Kok Kiong says besides the thematic play, most auto stocks rallied due to their promising future profits.

However, JF Apex Securities in a recent research report does not expect the rally to continue as some profit-taking is expected with the upcoming GE14, with stock movement post-election highly dependent on the poll outcome.

For DRB-Hicom, William’s Ng says the investing community expects better profitability from the conglomerate after disposing of its 49.9% loss-making Proton Holdings in June last year.

For Q2FY18 ended Sept 30, DRB-Hicom returned to the black with a net profit of RM736.56 mil from a net loss of RM309.63 mil, due mainly to the recognition of the government research and development (R&D) grant.

Proton received RM1.1 bil in reimbursement for its previous R&D efforts. The grant was given to Proton if it found a strategic partner with a definitive agreement.

Fund managers expect Proton to implement more cost-cutting measures

Under newly-appointed CEO Li Chunrong, the national automaker is formulating a business plan to turn around, leveraging the Geely group’s global resources.

Recently, Second Minister of International Trade and Industry Datuk Seri Ong Ka Chuan said Li has given an ultimatum to Proton’s part suppliers to cut prices by 30% by year-end.

Fund managers say price cuts are common in China and often yielded positive results. They expect Proton to implement more cost-cutting measures.

MIDF Research says MBM Resources Bhd remains a buy with a target price of RM2.45 as it is a cheap proxy to Perodua’s volume expansion and the spillover on its part manufacturing and Perodua dealership units.

It says key catalysts for MBM include strong growth in Perodua’s total industry volume (TIV) on the back of its new Myvi and potentially new SUV to fill up a vacuum in its model mix, as well as a stronger ringgit and recovery in industry production driven by new national car launches.

William’s Ng says positive investors’ sentiment on UMW Holdings Bhd is likely due to its corporate exercise last year when it exited the oil and gas segment. In addition, he expects the group’s aerospace segment to yield higher profit in the coming financial year, after delivering its maiden fan case in November.

For Sime Darby Bhd, Ng says the rise in its stock price was due largely to its demerger. In November, the conglomerate demerged itself into three listed entities, namely, Sime Darby Plantation Bhd, Sime Darby Property Bhd and Sime Darby.

Automotive arm Sime Darby Motors is involved in the retail, distribution and assembly businesses. It is headed by Datuk Lawrence Lee, who is MD of the motor division.

Affin Hwang Research expects the motor division – the number two BMW dealer globally – to post higher revenue growth in FY19-20, driven by the German marque’s product upcycle and attractive model line-ups from other players.

In the case of Tan Chong Motor Holdings Bhd, Ng says improvement is due to expectation of a turnaround. The Nissan distributor, which stopped new model launches in the past two years, plans to introduce three new models in 2018.

MIDF Research recently raised Tan Chong to a buy with a target price of RM2.05 due to a deep value play into the sector’s earnings recovery.

Tan Chong is led by president Datuk Tan Heng Chew

“Having seen its share price fall some 40% in the past 24 months, Tan Chong now trades at just 0.4 times FY18 price to book value (PBV), which is lower than even its historical trough PBV of 0.5 times, amid a potential turnaround in earnings over the next few years,” Ng says.

Tan Chong had a 4.1% TIV market share in December, according to the Malaysian Automotive Association (MAA). The group is led by president Datuk Tan Heng Chew.

He attributes Cycle & Carriage’s lower share price to poorer vehicle sales, despite Mercedes Benz Malaysia setting another record year with 12,045 vehicles delivered, up 2.3% from 2016. 

Recession unlikely this year

Regional markets have been rallying since the US sub-prime crisis in 2008/09. However, the good run may be coming to an end judging from the 10-year economic cycle.

As it is, Malaysia’s major trade partner China has been slowing its growth in recent years while US will continue with its qualitative easing, which indirectly reduces global liquidity.

However, economist and analysts are sceptical Malaysia will face an economic recession this year.

Sunway University Business School professor of Economics Prof Yeah Kim Leng says using the 10-year interval between the 1997/98 Asian financial crisis and the 2007/08 global financial crisis to foretell a downturn in 2018 can be considered a “naïve way” of forecasting.

Yeah says the global economy is going through the broadest synchronised growth since 2010

“Barring a black swan or a ‘known unknown’ event such as a hard landing of the Chinese economy, the probability of Malaysia and other countries in the region experiencing a recession in 2018 is very low for several reasons.”

He explains the global economy is going through the broadest synchronised growth since 2010 while forward-looking indicators point to the global growth momentum continuing through 2018,

In addition, regional economies, including Malaysia’s, are experiencing robust demand driven by employment and income growth with additional support from government spending.

Yeah says Malaysia’s strong growth, particularly last year’s export surge, can be attributed to the broad-based global upturn and rising world trade.

“Malaysia’s export-oriented sector is expected to continue experiencing the spillovers from strong external demand. All these developments point to continuing economic expansion in 2018,” he explains.

Despite the improved gross domestic product (GDP), as well as the consumer sentiment and employment indices, most Malaysians see a mismatch in the reported economic data, especially with Bank Negara Malaysia’s move to hike key interest rate by 25 basis points on Jan 25.

Yeah, who is also an external member of the central bank’s Monetary Policy Committee, says with growth becoming more deep-rooted, there is a need to adjust monetary conditions, especially to avoid keeping interest rates too low for too long.

iFast Capital Sdn Bhd research analyst Jerry Lee says the interest rate hike is unlikely to have a significant impact on consumer spending.

This is in view of the Budget 2018 proposals to cut personal income tax, extend cash handouts (BR1M) and other incentives to government servants, which are likely to lift the average household disposable income and spending power of a broader base of people.

“It is likely to have a positive spillover effect to the consumer consumption,” he adds.

Lee does not foresee any major economic crisis in Malaysia and regional markets, saying he expects sustained synchronised global growth.

He says global equity markets have lifted significantly this year compared with early 2017, with most of them pricing in positive earnings growth even with relatively higher forward earnings multiples.

“If corporate earnings turn out to surprise the market on the downside, most of these markets might head for correction. However, this would only occur given that the corporates’ earnings happen to disappoint the market participants, which we think is unlikely to materialise in 2018, given the current escalating global economic growth.”

This article first appeared in Focus Malaysia Issue 270.