PETALING JAYA: The local auto and auto parts sector could face speed bumps ahead, in terms of potential slowdown in the second half of this year (2H22) despite anticipation of a strong 1H22 performance.

       According to RHB Research, auto distributors may experience margin pressures due to higher input costs and potential discounts to support auto sales, following the sales and service tax (SST) holiday.

       While the Malaysian Automotive Association (MAA) has requested for an extension of the SST exemption period, the research house said: “Our base case assumes it will not be extended.”

       To support sales volumes, RHB Research opined that auto distributors may provide discounts at the expense of margins.

       “Costlier car parts may further pressure margins, with different distributors having varying abilities to pass on higher costs.

       “We think Sime Darby Bhd and Bermaz Auto Bhd (BAuto), which mostly sell higher-end cars, are less likely to face margin erosion as demand for higher-end cars tend to be more price-inelastic, especially so with the ongoing supply shortage.

       “Conversely, national marques with more affordable brands may not be able to pass on much of the higher costs and therefore be more susceptible to margin pressures,” explained RHB Research.

       On the excise duty reform in 2023, the research house expects the reform would change the definition of a vehicle’s open market value (OMV) to include the profits and expenses incurred, during not only the manufacturing process, but also the sale.

       MAA had said that the higher OMV would result in a higher excise duty, and could raise completely-knocked-down (CKD) car prices by 8% to 20% in 2023.

       “In our view, this would bring forward car sales to 2022 and reduce car sales in 2023.

       “Though our estimates currently assume there will be no reform, pending further announcements, we highlight the downside risks to the sector, as we think the market has yet to price this in,” added RHB Research.

       The research house also expects the foreign exchange movements to have immaterial earnings impact, for now.

       While UMW Holdings Bhd and Tan Chong Motor Bhd could lose from the stronger United States dollar, it said “the 4.20 year-to-date greenback and ringgit average is still within our forecast FY22 of 4.225.”

       Though BAuto’s 30% associate Mazda Malaysia Sdn Bhd (MMSB) marginally benefits from a weaker yen, the impact is largely limited, as MMSB also buys local components in ringgit.

       For now, the research house maintains a total industry volume of 540,000 for FY22.

       Given the potential headwinds, RHB Research currently does not have any “buy” calls under the sector, but favours MBM Resources Bhd for its sector-leading forecasted FY22 yield of 7%.

       MBM is also relatively less impacted by the foreign exchange movements, it added.

       StarCarSifu