• Top Picks: Bermaz Auto and Sime Darby. TIV in 2022 hit a record high 721k units on the back of a record high total production volume of 702k units. The strong numbers were driven by pent-up demand, new launches, sales and service tax (SST) exemption, and recovering supply chains. We expect 2023F TIV to soften to 600k and remain NEUTRAL on the sector, as we expect 2023 earnings to decline from a high base (due to softening sales) and as forward valuations are at or above historical averages.

• Record breaking 2022. With a 2022-high TIV of 77k in December, TIV in 2022 came in at 720,658 units (+42% YoY), breaking the previous record of 666,598 units in 2015. TIV of 721k units in 2022 is also higher than both our forecast of 700k and Malaysian Automotive Association (MAA)’s 630k estimate. The strong volume is mostly a result of the expiry of the SST exemption – which prompted customers to rush to place orders – and an improved production. Notably, 2H22 TIV was 17% higher than 1H22 TIV, as companies rushed to deliver the orders in 2H22, which was aided by the recovering supply chain.

• Total production volume (TPV) in 2022 of 702k also hit a record high, up 46% YoY. The large increase was mostly due to a recovery in supply chain and a lack of movement restrictions in 2022 which facilitated an increased production. Proton and Perodua recorded increases of 34% and 47% YoY while Toyota and Honda led the non-national marques with 66% and 45% YoY increases. MoM, TPV rose 5% as companies ramped up production in December to fulfil their orders. The two national marques produced at full capacity and would most likely continue to do so in 1Q23.

• Our 2023F TIV stands at 600k, which represents a 17% YoY decline from 2022’s high base. Since we expect remaining supply issues to diminish in 2023, our lower TIV forecast is mainly premised on softer demand in 2023, due to the lack of SST-exemption and higher car prices. That said, we note that if the newly-launched cars (ie Toyota Vios and Innova, a potential Perodua sedan, and the Proton X90) are more popular than expected, there may be upside risk to our 600k TIV forecast. MAA previously forecasted a 2023 TIV of 636k units which it revised to 650k units.

• Still NEUTRAL. Similarly to the strong 4Q22 TIV, we expect 1Q23 to be robust, as it is the last quarter for companies to deliver SST-exempt orders. While the companies likely already have orders on hand to be delivered in 2Q23, they lack visibility on the orders to be delivered in 2H23. We also note that the companies’ valuations are at or above historical means and there is a lack of re-rating catalysts. Our top picks are Bermaz Auto and Sime Darby for their sturdy dividend yields of c.7% and 5%.

• Key risks: Downside risk consist of persistent macroeconomic headwinds that may further soften orders, higher-than-expected interest rates, and a resurgence in supply chain constraints. Upside risks include stronger-than- expected orders and favourable FX movements.

Source: RHB Research - 25 Jan 2023