April 27, 2009
TOTAL industry volume (TIV) for the automotive sector last month showed an improvement, but sequential growth was in line with historical trends given the shorter number of working days in February.
March TIV registered at 44,205 units – representing 20 per cent month-on-month (MoM growth).
However compared to the corresponding month last year, there was a five per cent decline, in line with the year-on-year (YoY) drop seen in February.
Toyota and Honda led MoM growth registering a 33 per cent and 34 per cent rise respectively, attributable to a pick up in sales across the board.
Honda in particular, saw sales of its City (launched in December last year) rising 35 per cent after flat MoM growth registered in the prior month.
Visits to showrooms revealed that Honda is offering up to RM2,000 discounts for its City model, which could have contributed to the sales boost.
So far, the nine per cent year-to-date (YTD) decline in TIV is still holding up better than our forecast of a 23 per cent YoY decline for the whole year, but we expect sluggish sales ahead as buying interest weakens further on weak consumer sentiment and uncertain unemployment prospects.
Moreover, tight lending facilities will prevail more significantly – going forward as banks strive to maintain a quality asset base – in anticipation of rising non performing loans (NPLs), which has already shown a five per cent uptick in the fourth quarter of the last financial year (4QFY08).
In addition, interest rates have been jacked up by almost one percentage point (ppt) for non-national cars and second-hand cars, which will have a dampening affect on car sales going forward.
More importantly, a hike in interest rates will translate into sluggish demand for second-hand cars – typically fetching even higher interest rates (of between three and five per cent) than new cars – which in turn will lead to drops in second-hand car values.
The spillover effect is such that replacement car buyers may hold back new car purchases given lower trade-in values and the higher down payment needed.
The likelihood of increased down payment requirements coupled with up to one ppt hike in interest rates – locked in over the loan tenure – effectively downsizes consumer’s financial ability to purchase new cars and could result in down trading to cheaper models or makes.
This would be especially true for the segment of buyers who would need to stretch their budgets, just to purchase a non-national brand car – contrary to the typical school of thought that tend to perceive non-national car buyers as having financial resilience.
Toyota, as an example, has seen sales contracting some 28 per cent YTD.
To recap, we project TIV declining 23 per cent YoY to 423,000 units for this year, before recovering slightly by one per cent next year.
We have forecasted Toyota to drive the decline by 29 per cent, followed by Proton at -22 per cent and Nissan at -18 per cent.
We reaffirm our NEUTRAL call on the auto sector given the sluggish prospects of auto sales, muted earnings outlook, volatile currency and prospects of margin contraction amid diseconomies of scale of manufacturing operations and price discounting.
We retain our HOLD call on Tan Chong [fair value (FV): RM1.18 per share], while our BUY call on UMW (FV: RM6.35 per share) has been put under review.
Proton remains a BUY given prospects of structural improvements, favourable policies leaning towards national carmakers and hugely depressed valuations – we are in the midst of reviewing our earlier FV for Proton of RM3.20 per share.
Source: http://www.theborneopost.com/?p=50934
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