Gradual recovery seen for automotive sector

PETALING JAYA: The auto sector is seeing positive signs of recovery in the second half although key challenges remain, said a CGS-CIMB research report.

The research house has maintained its “neutral” rating on the auto sector despite total industry volume (TIV) recovery prospects, amidst stricter lending requirements from financial institutions, a relatively higher motorisation rate and unfavourable foreign exchange environment.

CGS-CIMB research had recently hosted Malaysian Automotive Association (MAA) president Datuk Aishah Ahmad (pic below) at a virtual webinar, and key takeaways included the fact that stricter lending approvals from financial institutions remain a key challenge.

For example, while hire-purchase loan applications reached nearly RM8bil in June – the highest in 24 months, the loan approval rate fell to 50%, compared with the 65% average during the 2018 tax holiday period.

And with consumers being more cautious on spending on big-ticket items like motor vehicles, the second half TIV may not be as exciting as the previous tax holiday period in 2018.

MAA had upgraded its 2020 TIV forecast from 400,000 to 470,000 after taking into account the government stimulus packages including a waiver of sales taxes on cars until end-2020.

Also, MAA expects TIV recovery to take more than two years before returning to pre-Covid 19 levels, with the TIV forecast to reach 550,000 in 2021 and 600,000 in 2022, as consumer sentiments normalise and businesses resume production.

To boost auto sales, MAA is also appealing to the government to revert to the previous open-market value methodology, which was scheduled to be revised in 2021, so that it will not lead to higher car prices, especially for completely-knocked-down (CKD) models.

MAA also proposed for tax incentives in the upcoming Budget 2021 to encourage the assembly of electric vehicles to promote Malaysia as an energy-efficient vehicle (EEV) hub in the region.

Another MAA proposal is the implementation of a vehicle end-of-life (ELV) policy by offsetting the amount of excise duties paid by automotive players to the government.

This will help address the funding issue to incentivise consumers to swap their older vehicles for new ones.

Aishah also highlighted that sport-utility vehicle (SUV) sales growth will continue, driven by new SUV launches and lower entry point for ownership.

The SUV penetration rate surged from 14% in 2018 to 23% in 2019, mainly driven by new SUV models from Proton and Perodua.

Aishah noted that demand for ride-hailing and car-sharing had been affected due to a drop in ridership and active users over increasing health concerns.

In turn, the pre-owned vehicle segment has benefited, as pre-owned vehicle sales jumped 100% year-on-year in June and 20% month-on-month in July.

She said this was due to consumers downgrading to cheaper vehicles, in light of the economic uncertainty, and health concerns (as consumers are hesitant to use public transport and feel safer driving their own cars).

Aishah added that demand was particularly strong for pre-owned vehicles in the sub-RM30,000 price range.

According to CGS-CIMB research, valuations in the auto sector are reflective of improving sector earnings prospects in the second half.

The research house said Bermaz Auto, Sime Darby and DRB-Hicom are the preferred proxies to the new vehicle sales tax exemption, given their leading market positions in the premium and luxury segments.