• The Ministry of Finance has announced that the sales and service tax (SST) exemption for new vehicle orders will not be extended beyond 30 June 2022. However, prospective buyers who have placed orders before 30 June 2022 are allowed to register their vehicles with the Road Transport Department until 31 March 2023 and will be eligible for the sales tax exemption.

• We believe this would lead to a further surge in orders as consumers rush to take advantage of this before June ends, adding to automobile firms’ already long booking queue. This also will prevent a hard landing of industry sales as automakers will have time to replenish their order book for deliveries after March 2023.

• However, the shortage of inventory causing the supply chain bottleneck likely will limit the number of vehicles that could be delivered by automakers/distributors within the 9-month registration period (July 2022 – March 2023). According to the Ministry of Finance, the domestic automobile industry has a collective booking of 264,000 units pending to be delivered.

• Based on our 2022 industry volume forecast of 590,000 units, this translates into 5.4 months of industry sales and is in line with our channel checks, which reveal waiting periods of 4-7 months for key models.

• We maintain our OVERWEIGHT recommendation on the sector and 2022 total industry forecast of 590,000 units. The sector revenue predominantly depends on domestic demand; hence it would be relatively shielded from the impact of geopolitical conflicts. Riding on the pick-up in broader economic activities, we believe demand for passenger cars continues to be robust.

• Our top picks are MBM Resources (BUY, fair value RM5.00), Bermaz Auto (BUY, FV RM2.25), and UMW Holdings (BUY, RM4.60).

Source: AmInvest Research - 21 Jun 2022