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Strong Growth Expected In The Malaysian Auto Industry
Malaysia Perspective | 24 August 2010

Compiled By Ann Lee

Despite negative news of recalls in Japan and South Korea, the Malaysian auto industry continued to grow healthy. Year on year growth was seen positive as at May 2010. Total industry vehicles (TIV) grew by a strong 16% y-o-y to 50,800 units in May 2010. This came on the back of a low base in 2009, which was affected by the global financial crisis.

On a year to date (YTD) May 2010 basis, the TIV of 247, 000 indicates a 20% y-o-y growth, which is reflective of the low-base effect of early 2009. The Malaysian Automotive Association (MAA) attributed the healthy sales to “favourable market conditions and the increase in output to keep up with demand.” On a month-on-month basis, May 2010 TIV increased by 4% against a 13% decline in April 10. The exception was March 2010 which saw a strong 38% m-o-m jump from a low base in February 2010 due to a shorter month (hence, fewer production days) and Chinese New Year festivity breaks.

On a YTD basis, Perodua gained 0.9% in market share from a year ago. It sold 79, 000 units during the period, which is up 23% y-o-y. Honda, on the other hand, lost 0.8% in market share. Sale of Honda vehicle was relatively flat at 18, 000 units (+3% y-o-y) vs. 20% y-o-y recorded by the industry. Collectively, Perodua and Proton, gained 1.3% market share to 58.4% for YTD May10. These two brands continue to dominate the market with their low-cost and entry-level vehicles, and are expected to remain market leaders in Malaysia. Meanwhile, shares of Toyota and Nissan vehicles were stable at 15% and 6% respectively YTD May 2010.

Strong GDP Keeps Market Healthy
The strong growth in the Malaysian economy especially in the first quarter was a key reason for growing vehicle sales. Another important reason was the minimal effect of interest rates hike on sales figures. Interest rates for hire purchase (HP) were raised last month. For new non-national cars, interest rates were raised by 25 basis points while rates for national makes were lifted by 10 basis points. This effectively narrowed the gap in interest rates between national and non-national brands. Interest rates for new national vehicles used to command 50 basis points higher rate against non-nationals, but it slowly reduced to just about 35 basis points more.

The impact on monthly HP repayment is minimal. For example a RM100,000, 5-year loan at 3.85% (vs. 3.75% previously) for a national car would incur additional monthly repayment of only RM9 (a negligible 0.5%) while the impact on purchasing a non-national make is only an additional RM20 (a negligible 1%) based on 3.5% (vs. 3.25%) rate. This is unlikely to affect auto sales. In addition to this, the Malaysian Ringgit had strengthened versus the US Dollar to an average of RM3.37 in 1Q-2010 and RM3.24 in 2Q-2010 from an average of RM3.40 against the US Dollar in 4Q-20009. However, the Japanese Yen is forecast to weaken against the US Dollar in 2H-2010, implying a weak Japanese Yen versus the Malaysian Ringgit as well Compared to an average of RM3.76 against 100 Yen in 3Q-2009 and RM3.79 in 4Q-2009, the Malaysian Ringgit had firmed against the Japanese Yen to a RM3.60-level in June 2010. Manufacturers like Proton, and to a small extent Perodua, who have Japanese Yen exposure, are likely beneficiaries.

Total Industry Vehicles Sales To Reach Record High
With a current figure of 247,000 vehicles sold in Malaysia YTD, it is projected that 2010 total industry vehicles (TIV) to reach a record high of 578, 000 units. The previous TIV record was in 2005 with 552,000 units sold. The 2010 forecast factors in 8% unit sales growth for Perodua, 8% for Proton, 8% for Toyota, 10% for Nissan and 6% for Honda. The full year TIV sales growth of 8% y-o-y is much lower than 20% recorded in YTD May 2010.However, YTD May 2010 growth benefited from a low base in early 2009. Average monthly TIV for YTD May 2010 was 49,000 units while the average a year ago was only 41,000. In comparison, the 2H-2009 rebounded to an average of 48,000 a month, which approximates YTD May 2010 average. Hence, it is not expected for the strong 20% y-o-y growth in YTD May 2010 to continue in 2H-2010.

The Muslim fasting season which is expected to start in August 2010, one month ahead of Hari Raya, is historically a good period for auto sales because consumers prefer to take delivery of new vehicles ahead of Hari Raya celebrations. Hence, more aggressive promotions with Hari Raya themes in August is expected o boost sales. However, following the Hari Raya festive season, the TIV sales are expected to slow down in October during the 4Q-2010. Also, as we approach the end of 2010, TIV sales tends to be seasonally weaker because car buyers would rather register their cars as “new” in the following year.

The positive news is that the market expects Proton to launch a Waja-replacement model (expected to be based on the current Mitsubishi Lancer) this year. This should enable the market to see some buying activity during the period. Meanwhile, Tan Chong, which had made an aggressive comeback in the past one year, is expected to introduce a new Teana. It competes head-on with the Toyota Camry and Honda Accord. From UMW, we expect at least one new Toyota model or variant in 2H-2010. Meanwhile, UMW plans to produce Toyota Camry’s at its Shah Alam plant in 2 years time, with a budget of RM100 million, as compared to importing from Thailand previously. However the selling price of the locally assembled Camry is expected to be similar to the Thai model In support of Malaysia’s National Automotive Policy (NAP) however, producing Camry’s here opens the opportunity for UMW to use more local content. Perodua on the other hand is not expected to introduce new models this year as it capitalises on firm demand for its Alza MPV and ride on the healthy industry sales volume.

Minimal Impact To Forecasts
There is a minimal 2% impact to forecast earnings of auto stocks under coverage. It is expected that quarterly earnings to be strong, especially during the festive 3Q-2010. Analysts recommend a maintain BUY on Proton. They continue to like Proton for its turnaround from FY-2009 loss of RM302 million to a profit of RM285 million. The company restructured its distributorship making its marketing and operations more efficient. Loss of a potential partnership with Volkswagen (VW) is not seen as a major setback as the company had already turned the corner. Looking forward, it is positive for Proton, with the potential launch of a new model towards the end of 2010. It is also working on beefing up its presence in overseas market, as well as a new emphasis on turning around its Lotus division, with several key appointments recently.

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