THE automotive industry is looking to be among the hardest hit from the Covid-19 pandemic, says TA Securities.
“The automotive industry is going to take a major hit from the pandemic as weak demand and falling consumer confidence will continue to weigh on vehicle sales. Moreover, the situation is exacerbated by the Movement Control Order (MCO), which may spoil the seasonally strong pre-Hari Raya sales this year,” says analyst Angeline Chin.
She noted that during the 1997 financial crisis, the tight liquidity of the market combined with high interest rates had dampened the total industry volume (TIV) by 60% to 164,000 units in 1998 from 405,000 units in 1997.
The dot.com bubble burst of 2001-2002 also saw 2003’s TIV contracting by 6.9%, with the Global Financial Crisis of 2007-2009 seeing a 2% decrease in TIV for 2009 as things started to turn around in the second half of that year.
The European debt crisis and the earthquake and tsunami in Japan in 2011 saw TIV dropping 0.8%, a sharp decline from 2010’s growth of 12.7%.
As such, Chin is cutting TIV in 2020 by 29% to 431,000 units from a previous 0.8% growth,
citing the impact of the MCO and weakening consumer sentiment, which will continue to weigh down vehicle sales until the third quarter.
“The local automotive sector is vulnerable to the financial crisis and stock market meltdown.
From our observations, the impact on car sales depends largely on the Malaysian economy, in effect the gross domestic product (GDP) growth.
“Our study indicates a positive correlation of up to 0.6 between TIV and Malaysia’s GDP growth. This is moderately strong to conclude that there is a linear relationship between the two variables,” explained Chin, adding that the cut in TIV for 2020 is in tandem with the estimated 0% growth in GDP for Malaysia this year.
Chin maintained a neutral stance on the auto sector, noting that the fear of the Covid-19 pandemic and a global recession have caused significant sell-offs in the market, including in auto stocks.
This has resulted in attractive valuations, with most auto stocks now trading at single-digit 2021 price-to-earnings ratios (PER) except for Sime Darby Bhd, which is trading at a 13.4x PER.
“We believe the sector is deeply oversold, and thus maintain a buy call on most of the stocks under our coverage except for Sime Darby (target price: RM1.71), which is now rated as a sell due to limited upside,” said Chin. — April 7, 2020
