Kenanga Research said the automotive sector’s earnings visibility is still good and backed by a booking backlog of 170,000 units as at the end of July.
PETALING JAYA: Kenanga Investment Bank Bhd
has placed a “neutral call on the local automotive sector as competition intensifies this year.
In a report, the research house said the sector’s earnings saw a drop in the second half of its reporting season particularly for DRB-Hicom Bhd and Tan Chong Motor Holdings Bhd, as both registered quarterly losses due to unfavourable environments.
It said DRB-Hicom’s core net profit had almost halved year-on-year, dragged by its second quarter losses due to wider sequential quarter losses at its postal segment, as well as longer closure of auto parts manufacturing plant on extended festive holidays and higher tax.
On Tan Chong, Kenanga Research said wider losses than its forecast were reported, as the sales volume of its bread-and-butter Nissan vehicles fell as competitors flooded the market with new models, while unfavourable foreign exchange movements worsened the situation.The research house said there would be a two-speed automotive market locally.
“It will be business as usual for the affordable segment as its target customers, namely the bottom-40% group, will be spared the impact of the impending fuel subsidy rationalisation and could also potentially benefit from the introduction of the progressive wage model,” it said.The civil service pay rise will also partially restore spending power eroded by high inflation.
However, Kenanga Research said the same cannot be said for the mid-market segment as its target customers like the middle-40% group may hold back from buying a new car, or may down trade to a smaller car or even switch to an electric vehicle to cut their fuel bills upon the introduction of a fuel subsidy rationalisation.
“Moreover, the implementation of e-invoicing is set to have a major impact on new car purchases, especially on the mid-market segment, given that it will essentially cease the common practice of providing 100% hire purchase financing,” it noted.
Meanwhile, Kenanga Research said the sector’s earnings visibility is still good and backed by a booking backlog of 170,000 units as at the end of July.
“More than half of the backlog is made up of new models, alluding to the appeal of new models to car buyers and this trend is likely to persist throughout this year, given a strong line-up of new launches,” the research house said.
Kenanga Research said Bermaz Auto Bhd met its forecast despite plunging 30% year-on-year, as Mazda and Kia’s sales volumes dropped on the back of intense competition from Chinese companies and rising costs of imported units on the weakened ringgit against the yen.
Its top pick is MBM Resources Bhd for its strong earnings visibility, backed by an order backlog of Perodua vehicles of more than 100,000 units and its 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles.
