Pricing may rise as auto sector prepares for potential duties increase

By Xavier Kong

NEWS of a possible increase in effective duties and taxes for automotive original equipment manufacturers (OEMs) could result in an increase in pricing, should the incremental cost be passed on to consumers.

MIDF Research analyst Hafriz Hezry noted that there could be an increase in effective duties and taxes payable by auto OEMs due to a change in duty and tax calculation mechanisms, which now encompass a larger scope.

However, preliminary checks suggest an impact of less than 10% to pricing if the cost increase were to be passed on to consumers, though this would vary by players depending on the kit imports through to assembly and distribution arrangements, as well as the segregation of profit and cost of completely knocked-down (CKD) units.

“Earlier in the year, it had been reported that MITI (Ministry of International Trade & Industry)  and the Ministry of Finance have been in discussions to look at the duty structure for the auto sector,” said Hafriz.

The new definition of the open market value (OMV) under the latest Federal Government Gazette released in December 2019 now includes royalties, assembly charges and dealer margins, as well as other costs of distribution, and this is expected to lift the OMV slightly as compared to the previous definition.

“There is no indication so far on changes to excise duty rates, which ranges between 75% and 105% for passenger cars. Assuming the rates remain status quo, the higher OMV could result in higher effective duties payable by OEMs,” noted Hafriz.

Completely built-up units (CBUs) are also reported as seeing a new mechanism where excise duties will be charged on actual transactional value, and Hafriz pointed out that this means forex movements may now also impact duty cost.

“Should the changes in import and excise duty mechanisms change as reported, there could also be a snowball impact on SST charges, as SST is charged on these base values plus the vehicle duties,” he explained.

The research house maintains MBM Resources Bhd as its top pick, with a buy recommendation and a target price of RM4.55, noting MBM as a cheap proxy to Perodua’s volume expansion and the spillover on its parts manufacturing and Perodua dealership units.

A buy recommendation is maintained on Bermaz Auto Bhd as well, due to new model launches, dividend outperformance, potential brand expansion on its solid balance sheet, as well as potentially being a beneficiary of National Automotive Policy incentives to drive CBU exports.

At the noon close, MBM’s shares were last traded at RM4.03, down two sen, with 42,900 shares changing hands, while Bermaz Auto’s shares were last done at RM2.02, up a sen, with 1.1 mil shares traded.

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