Company Name: PROTON HOLDINGS BHD
Research House: CIMB
Proton Holdings Bhd (trading buy, target price RM5.95. Jan 21, RM4.54); Tan Chong Motor Holdings Bhd (outperform, target price RM9.15. Jan 21, RM5.08); UMW Holdings Bhd (outperform, target price RM8.85. Jan 21, RM7.25)
We remain bullish on the auto sector and maintain 'outperform' as this traditionally high-beta cyclical sector should ride on the liquidity-driven market uptrend. The stock market is rising, the economy is projected to grow at a robust 5.5% this year and consumer sentiment is strong.
Against this backdrop, and backed by a solid pipeline of new models, 2011 should turn out to be a record year for vehicle sales. Although much of the ringgit's appreciation against the US dollar happened last year, the average US dollar cost is still expected to be lower this year, which will support the earnings of auto players with net exposure to the currency.
We maintain our 'overweight' call on the sector which could be catalysed by: (i) strong vehicle sales; (ii) a firming ringgit; and (iii) more accommodating auto policies. Our top pick remains Tan Chong.
The year 2010 was a watershed year for auto players in Malaysia. Vehicle sales breached the all-time high of 605,156 units (+13%), driven by strong pent-up demand, good response to new models and a broad-based recovery of economic conditions and consumer confidence.
Auto players' exposure to the US dollar positioned them as ideal plays on the ringgit's strength. Our auto index, which comprises the three stocks we cover (Tan Chong, Proton and UMW) began to outpace the KLCI in 2Q10 as the market sat up and took notice of the robust sales and impact of the strong ringgit.
A noteworthy performer in the sector was Tan Chong which saw a share price surge of 66%. Tan Chong's regional ambitions and its plans to expand its model mix to cater for new market segments created excitement among investors.
We believe 2011 will turn out to be a record year for vehicle sales even though the low-base effect enjoyed last year will no longer be in play.
The two key determinants of vehicle demand ' consumer sentiment and new model launches ' look favourable. We are projecting 2011 sales to breach a new high of 626,890 units (4% growth) from 605,156 units (+13% year-on-year) in 2010.
Beyond these fundamental drivers, expectations of a rising KLCI should also spark interest in higher-beta cyclicals such as the auto sector.
We have not made any changes to our earnings projections, target prices and recommendations for the three auto stocks under coverage. We continue to rate UMW (TP RM8.85) and Tan Chong (TP RM9.15) as 'outperforms' and Proton as a 'trading buy' (RM5.95).
Tan Chong remains our top pick. Its share price is down 15% from its Sept 17 peak of RM6 even though there have been no fundamental changes to the company.
We advise investors to accumulate this stock given its regional foray and the strategic expansion of its model mix into previously untapped market segments.
The three rounds of hire purchase rate hikes and two rounds of fuel price increases (July and December) failed to derail the vehicle sales growth momentum.
The unexpectedly strong sales performance prompted the Malaysian Automotive Association to upgrade its vehicle sales growth forecast for 2010 from 2% to 6% in June 10.
Apart from the sales-driven top line growth, auto companies, especially the non-national players, also benefited from the ringgit's surge against the greenback as this translated into lower costs for imported content. Auto players' exposure to the US dollar positioned them as ideal plays on the ringgit's strength. Over the span of 12 months, the ringgit appreciated close to 11% against the greenback. ' CIMB Equities Research, Jan 21
This article appeared in The Edge Financial Daily, January 24, 2011.