AUTOMOTIVE (UNDERWEIGHT) Sector Update: Weak Loan Approvals Cause Hard Landing

Stock Name: EPMB
Company Name: EP MANUFACTURING BHD

Research House: OSK

Price Call: BUY

Target Price: 1.38

Stock Name: UMW
Company Name: UMW HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 6.18

Stock Name: TCHONG
Company Name: TAN CHONG MOTOR HOLDINGS BHD

Research House: OSK

Price Call: SELL

Target Price: 4.00

Stock Name: MBMR
Company Name: MBM RESOURCES BHD

Research House: OSK

Price Call: SELL

Target Price: 3.69

Stock Name: DELLOYD
Company Name: DELLOYD VENTURES BHD

Research House: OSK

Price Call: HOLD

Target Price: 3.88

TIV for the first month of 2012 was a shocker, sinking 25.3%y-o-y and 14.2% m-om due to weak loan approvals and the long public holidays inJan,  and to some extent, the impact ofthe Thai floods. The banks' new lending guidelines effective 1 Jan 2012 led tothe rejection of many loan applications for vehicle purchases. As approvalsrates in 2HFY11 were  already at a low of48%, we expect this to have gone even lower to an estimated  30%-40% for Jan, but  retain our TIV growth forecast of 1.1% for2012 as it  may  be premature to make drastic changes  in estimates for  the first month of a  year. We  keep our bearish view on autosand continue to advocate taking positions in fundamentally undervaluedautopartsstocks with earnings upside potential that may win new contracts asautomakers aim for higher localization. EPMB is our only BUY among our autostocks.

Sharpest contractionsince Japan's  tsunami.  TIV for the first month of 2012 was a stinker,plunging 25.3% y-o-y and 14.2% m-o-m due to weak loan approvals and the longholidays during the month, and to some extent, the aftermath of Thailand's destructivefloods. The passenger segment shrank sharply by 26% y-o-y, led by passenger cars and 4WDs, which fell 30% and 48%y-o-y respectively. The commercial segment was also not spared, posting a 21%y-o-y decline.

New lendingguidelines  keep  buyers away.  Bank Negara's new lending guidelines effective1 Jan 2012 and implemented by banks subjecting loan approvals to purchasers'debt service ratio (capped at circa 60% notably for most civil servants) to totalnet income as opposed to the previous debt service ratio averaging at 70% ofgross income (a higher denominator) resulted in a lot of rejected loanapplications from potential vehicle buyers. The new guidelines do not onlyapply to the hire purchase segment but across the board, including housingloans, credit cards and personal loans. According to Proton dealers, approvals rates back in 2HFY11were already at a low of 48%, which we estimate may have trended even lower to30-40% in Jan. 

Policy  U-turn?  The central bank's aim of promoting financialprudence via the new lending policy is not welcome news in boosting sales ofbig ticket items, notably housing and vehicle purchases. While the degree ofleniency on the denominator (ie gross income) is unlikely to be reversed, banksare still flexible when it comes to the cap on the debt service ratio.

How top 5 marquesfared.  The month of January did notgo too well for most  auto players. WhilePerodua continued to retain pole position, sales  were down 11% y-o-y, although  stillfar better than Proton, Toyota, Nissan and Honda, which saw sales plunging by28% / 23% / 28% / 89% y-o-y respectively. That said,  Perodua numbers may besomewhat misleading since January 2011 came off from a low base given that mostpotential Myvi buyers held back on their purchases in anticipation of the newMyvi,which was unfortunately delayed when the tsunami hit Japan.

Preview of NAP. Afew days ago, the media reported that the Government is considering reopeningthe 1.8-liter vehicle segment. To put things in perspective, the restrictionson foreigners with 100% ownership setting up manufacturing plants was lifted inthe last NAP in 2009, but this was confined to production of vehicles pricedabove RM150,000. We do not rule out the possibility of the  Government relaxing the price criteria, whichmay pave the way for the entry of VW in a bigger way and tap into the massmarket, as well as other automakers. We understand that currently the Government,together with consultants and industry players, is reviewing key aspectspertaining to the sector in its efforts to drive investment in the manufactureof hybrids and electric vehicles and gradually phase out Approved Permits(AP).  The revised NAP is due to be announcedin the next two months.

Maintain UNDERWEIGHT.We retain our TIV growth forecast of 1.1% for 2012 as it would be too prematureto make any drastic changes in  estimatesin  the first month of the year. Wemaintain our bearish view on autos and continue to advocate taking positions infundamentally undervalued autoparts stocks with potential earnings upside whichmay win new contracts  as car makers aimfor  higher localization. For autoparts,we have  a  BUY call on EPMB (FV: RM1.38), which we  feel will benefit from the rationalization of Proton's vendors after thetakeover by DRB-HICOM (NOT RATED) given the latter's status as reliable tier-1suppliers. However, no automakers warrant our BUY call, with UMW (AF:RM6.18) and Tan Chong (FV: RM4.00) remaining as SELLs. We have a NEUTRAL onProton following its proposed takeover by DRB-HICOM. 

Downgrade MBM and Delloyd.The share prices of most of the autoparts makers under our coverage have ralliedstrongly since the proposal to take over Proton on speculation that moretakeovers will emerge. We are downgrading MBM to a SELL, with our FV unchangedat RM3.69, despite two  contrasting  rumors that the company may be the subject ofa takeover by either Proton or UMW, and also a potential rights issue to fund  its acquisition of Hirotako. We are alsodowngrading Delloyd Ventures to NEUTRAL, with our FV unchanged at RM3.88, giventhe limited upside to its share price. EPMB  is our only  BUY among stocks in  our auto coverage.

Source: OSK188