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Wednesday, April 23, 2014

UOB Kay Hian Malaysia maintains Underweight on auto sector

Published: Wednesday April 23, 2014 MYT 1:32:00 PM 
Updated: Wednesday April 23, 2014 MYT 1:34:26 PM

KUALA LUMPUR: UOB Kay Hian Malaysia Research is maintaining its Underweight recommendation on the automobile sector as it expects consumers to rein in their spending and as inflation picks up pace.

It said on Wednesday that intensifying competition and government pressure on manufacturers to lower car prices would also squeeze manufacturers' margins.

UOB Kay Hian Research retained its Sell on UMW Holdings with a RM10 target price, based on 12 times 2015 forward price-to-earnings, which is the historical average.

"Against a backdrop of a saturated market with intense competition, the leader of the mid-tier segment, Toyota, remains under pressure," it said.

The research house said it was right in predicting the fall in UMW Holdings' share price as investors prefer to invest directly into its primary growth driver, UMW Oil and Gas - which contributes 18% of UMW Holdings' earnings.

"UMW Holdings' share price has fallen 10% year-to-date versus a negligible 0.03% decline in the KLCI index. Sales of its Vios are expected to slow from 2Q14 onwards as competition from Honda sets in," it said.

To recap, UOB Kay Hian Research pointed out the 1.4% on-year growth in 1Q14 total industry volume (TIV) was surprisingly weak versus the low base recorded in 1Q13 when car sales were slow ahead of the 13th General Election (GE13) in May 2013.

"While Toyota's sales were up in 1Q14 following the launch of its new Vios in Oct 13, the new Honda City launched last week is expected to put pressure on the Vios. We continue to expect macro headwinds for this sector," it said.

The research house said petrol pump prices were raised 10.5% in September 2013 to RM2.10 a litre for RON95 fuel while electricity tariffs were jacked up an average of 15% in January 2014. Last month, banks raised interest rates by about 40 basis points for hire purchase (automobile loans), further adding pressure on consumer discretionary spending.

Next month, gas cost for the non-power/electricity industries is set to rise about 20%, which is expected to ripple through the economy as well.

"Looking into 2015, implementation of the Goods and Service Tax (GST) potentially raises the cost of living further, not to mention the risk of further electricity tariff increases and further tightening of automobile financing to curb high household debt level.

"Rising competitive pressures as Mazda and Honda launched the Mazda3 last month and the City (B-segment) sedan last week. While the City could divert consumers' attention away from the new Toyota Vios (launched in October 2013), the Mazda3 puts pressure on Toyota's Altis (launched in Jan 14). Meanwhile, Honda's latest D-segment Accord that was launched in September 2013 is selling very well with 86% on-quarter growth, and remains a threat to Toyota's Camry," it said.

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