Top Pick: Sime Darby (SIME), Bermaz Auto (BAUTO). Yesterday, the Government announced that the Sales and Services Tax (SST) exemption will not be extended. Instead, vehicles ordered before 30 Jun and registered before 31 Mar 2023 will qualify for the tax relief. We expect customers to rush to place orders in the coming days, and for auto players to have large orderbooks. We lift 2022F TIV to 615k from 580k, as some 2023 sales will be brought forward to 2H22. Maintain NEUTRAL, on headwinds stemming from potentially softer orders in 2H22 (ie weak 2023 sales) and inflation.
The new policy is a good compromise between satisfying customer demand and shoring up government tax revenues, in our view. Recall that CKD and CBU vehicles will now be subjected to a SST rate of 10% each, vs 0% and 5% during the tax holiday. We highlight that the announcement is a clear signal to the market that there will not be any more SST exemptions for auto sales in the near future. We gathered from our channel checks that industry players are seeking greater clarity on the policy – eg what constitutes an order before 30 Jun – amid concerns of forged orders.
Expect record orderbooks on 30 Jun,as we believe that customers will be rushing to place orders over the next nine days, since this is their last chance to take advantage of the SST exemption. We take cues from BAUTO’s strong order book, which is a result of its absorbing of SST on orders placed before 31 May. We believe that customers who were looking to place orders in the coming months would likely rush to place their orders before 30 Jun instead. This may be at the expense of orders in 2H22.
Strong TIV in 2H22 from fulfilling orders, as we opine that the auto firms will be busy fulfilling the orders in the coming months. Because most of the marques and models currently have a waiting time that spans 2-6 months, we believe that most orders placed before 30 Jun 2022 should be delivered before end-2022 and, hence, qualify for the SST-exemption.
Raise 2022F TIV to 615k units from 580k units. We believe that the strong orders before 30 Jun will bring forward car sales to 2H22 from 2023, as most orders brought forward would be delivered in 2H22, instead of in 2023. Our forecast assumes that the chip/component shortage will continue to be a drag on supply, as seen in May’s TIV of 49,603 units. The Malaysian Automotive Association’s (MAA) 2022F TIV remains at 600k units.
Despite the higher TIV projection, we remain NEUTRAL on the sector, premised on multiple headwinds expected in the immediate term and in 2023. First, as orders may have been brought forward to June, there are concerns of softening orders in 2H22, which may translate to soft TIV in end-4Q22 and 1Q23. Second, persistently high inflation may erode consumer purchasing power, further softening demand. Third, inflation may pose margin compression risks. We like SIME and BAUTO for their ability to weather inflationary pressures – given their relatively more premium marques – and for the recovery in SIME’s auto sales in China.
Downside risks that may hamper the sector's recovery include persistent shortages of key components and delays in new model launches. Other downside risks include the tightening of bank approvals for car loans and a sharp weakening of the MYR. The opposite circumstances would present upside risks.
