Automotive - Neutral - 28 March 2012

Stock Name: MBMR
Company Name: MBM RESOURCES BHD

Research House: KENANGA

Price Call: BUY

Target Price: 5.38

Stock Name: UMW
Company Name: UMW HOLDINGS BHD

Research House: KENANGA

Price Call: HOLD

Target Price: 7.45

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

Research House: KENANGA

Price Call: HOLD

Target Price: 4.67

We are maintaining our Neutral rating on the automotivesector for 2Q12 given our view that the 1H will still likely remain subdued forauto sales as the market adjusts to Bank Negara's more stringent lendingguidelines for hire purchase loans as well as the normalisation of suppliesafter the Thai flood last Nov. We expect increased competition among theautomotive companies during this period to make up for lost sales after theslowdown in production last year, particularly between the Japanese marques andContinental brands.

 That said, we arekeeping our total industry volume (TIV) sales forecast unchanged at 613,674units (+2.3% growth), with a rebound likely in mid-2H of the year after theexpected slowdown in the 1H, driven by pent-up demand, a full scale recoveryfor Thai auto output and  the industry'sstill positive long term dynamics. More opportunities to realign one'sportfolio to the sector should be available only then, hence our Neutral callon the sector remains for 2Q12.      

As for stock picks, we prefer MBM Resources (OUTPERFORM; TP:RM5.38) given its current low valuation relative to its peers and potentialcatalysts from its Daihatsu tie-up to set up an electric automatic transmissionplant. In line with our sector Neutral stance, we are maintaining our MARKETPERFORM calls on UMW (TP: RM7.45) and Tan Chong (TP: RM4.67). However, we havea case-specific ACCEPT OFFER recommendation on Proton at RM5.50. 

Household debt anissue?  Of late, the issue of risinghousehold debts in the country (which has  risen  to 77.6%  in  3Q11) as  well  as Bank  Negara's  action in  imposing  more stringent financing conditions for hirepurchase loans (as part of its overall move to keep the rising household debtslevel and consumer loans in check) has raised concerns on its impact on  auto sales  in  the months  ahead.  But our affordability study indicates the average Malaysian household canstill meet all their current major debt commitments, so purchase of a car isstill within their means. We also expect the tighter lending guidelines to workitself out in 2H12. (See our upcoming Auto Sector update for a more detailedanalysis).

TIV February salesrebounded by 7.5% MoM. There were initial fears that the impact of BankNegara's action would have a big adverse impact to the industry and auto sales,especially when the total industry volume  (TIV)  sales in  January  fell by  a  strong 25.3%  YoY. However, February TIVsales have since recovered with a rise of 7.5% and 9.0% on a MoM and YoY basis.Nonetheless, we believe there would always be a pent-up demand should autosales fall too long or too much at any single time which has prompted us tomaintain our total industry volume (TIV) sales forecast of a rise of 2.3% forthe whole year, with a rebound likely in the 2H after an expected slowdown inthe 1H. 

Moving trend forcontinental cars.  Meanwhile, despitethe negative news which struck the automotive industry this year, we believe2012 would be a crucial year for the automakers to pick up their lost sales andmarket shares after the slowdown in production last year. However, we expectincreased  competition among theautomotive companies during this period, particularly between the  Japanese marques and Continental brands. We alreadyobserve that continental car marques have increased their local market sharesince Nov 2011 which as of the YTD, continental cars' market share hasincreased from 8% to 12% at the expense of Japanese cars, which saw theirmarket share shrinking 92% to 88%. 

Autoparts moving out?  Another trend that we have observed lately isthat the local autoparts players are slowly diversifying  out of their core business in auto part manufacturing,despite more foreign marques likely localising their assemblies ahead. For instance,autoparts player EPMB recently  acquiredMaju Expressway SB for its toll concessions while Delloyd Ventures has moved toinvest into the plantation business. We believe this is due to tougherenvironment for the pure autoparts players which are highly dependent on thedomestic automotive industry. However, we do not see a major impact on thecarmakers as they have the size and strength to source for autoparts both locallyand abroad.

Source: Kenanga