Maintain NEUTRAL. The Government’s decision to exempt sales tax on passenger car purchases should help to stimulate near-term demand for cars and help the sector regain its footing after being badly affected by the pandemic. CKD car prices could drop 5-6% and CBU cars 2-3%. We revise our TIV forecasts to 460,000 units from 400,000 units, implying a 24% YoY decline. We have BUY calls on Bermaz Auto, MBM Resources and DRB-HICOM.
Tax-free window revisited. The auto industry’s plea for assistance (refer to our report dated 30 Apr 2020) was answered after the Government proposed to exempt passenger cars from sales tax as part of its short-term economic recovery plan. The measure will give full exemption on the 10% sales tax for locally assembled (CKD) cars and 50% exemption on imported (CBU) cars. Based on our estimates, this will lower car prices by 5-6% and 2-3% for CKD and CBU cars. This exemption will be implemented from mid-Jun 2020 to endDec 2020.
Welcome relief. This measure is a much-needed booster for the industry after being forced to close down for almost two months due to the Movement Control Order (MCO). Without this incentive, consumers are likely to be a lot more cautious in committing to big ticket discretionary purchases even after the economy resumes. Coupled with historical low interest rates, consumers will be motivated to take advantage of the lower cost of owning a car. The tax exemption may bring forward 2021 demand into 2020, but we believe the impact would be offset by an improving macroeconomic environment.
What happened during the 2018 tax-free window? During the 3-month taxfree period in 2018, average monthly TIV was c.66,000 units vs 45,000 units during a normal month. Most distributors ran out of stock for many models despite production running at full capacity. Most auto players’ margins expanded, benefiting from the improved operating leverage. However, the macroeconomic environment in 2018 was much more favourable, and we think the impact will be milder this time around. Commercial vehicles will not benefit from the recent announcement.
Maintain NEUTRAL. The tax exemption would stimulate near-term demand for cars and help the sector to recover. We are revising our TIV forecasts to 460,000 units (from 400,000 units), with the view that many car buyers will want to take advantage of the reduced car acquisition costs. Our forecasts imply a 24% YoY decline for 2020. Accordingly, we upgrade Bermaz Auto to BUY (from Neutral) with a new MYR1.80 TP, while we maintain BUY on MBM Resources and DRB-HICOM with higher TPs of MYR4.00 and MYR2.45. There are no changes to our recommendations for the other stocks under coverage. There is a risk of consumers retaining a cautious outlook given the current state of the economy despite the sales tax incentive.
