Times are exciting for autoplayers in Malaysia. In spite of subdued consumer sentiment, stringent lending guidelines and the weak ringgit this year, carmakers are on the cusp of corporate change that will evolve the sector.
High on the list of said change is the newly-formed strategic partnership between DRB-Hicom Bhd (DRB-Hicom) and Zhejiang Geely Holding Group Co for the China-based latter to own 49.9 per cent in Proton.
This was the much-needed economic solution to rescue Proton out of its financial mess created by a business model that was unsustainable in its early years.
It would not only bring about good business opportunities for both companies, but contribute to the revival of the Malaysian automotive industry and emergence of indigenous brands, regionally.
However, the sector overall is toughening up. According to AmInvestment Bank Bhd (AmInvestment Bank) in its strategy report for the second half of 2017 (2H17), approval rate for loans on passenger cars averaged 51 per cent in the one year to April 2017, and this was on par with the average for 2016.
“This denotes that banks have remained just as strict as last year, and it may take some time for the approval rate to return to the average of 55 to 57 per cent in the two years prior to 2016,” the research firm said.
AmInvestment Bank noted that with regards to applications for car loans, bank loans for passenger cars were seven per cent higher year on year (y-o-y) in the January to April period, in tandem with the y-o-y increase in total industry volume (TIV).
“However, the monthly average amount of loans applied for the one year to April was two per cent lower y-o-y AT RM6.7 billion, indicating the present state of consumer sentiment,” it said.
Competing for revenue growth
On margins, AmInvestment Bank observed that they have generally reverted to the levels seen in early 2016 for companies, with the exception of Tan Chong Motor Holdings Bhd and DRB-Hicom.
Meanwhile, Proton and Nissan especially saw dual hits on their sales volume and margin.
The research firm pointed out that for the rest, retaining a status quo after the last five quarters seems to be the best-case scenario.
“Companies are competing for revenue growth. At the same time, they are trying to sustain their margins, which is challenged by the weaker ringgit,” it said.
“While the US dollar-ringgit rate has trended upwards in the last three quarters up until the first quarter of financial year 2017 (1QFY17), our house projects the ringgit to improve only slightly from here.”
This was premised on a strong domestic data for Malaysia while there appears to limited progress on the initiatives of US’s fiscal policy, it added.
As of May 2017, the Malaysian Automotive Association (MAA) saw that sales volume was 13 per cent or 5,932 units higher than the similar corresponding month in 2016.
This was on the back of the pre-Hari Raya festive season boost and new model launches.
Looking at year to date (YTD) figures, the auto sector’s total industry volume (TIV) was at 234,186 units, a 7.4 per cent increase from 218,121 units last year.
National marquees still in the lead
Nevertheless, the two national carmakers remain the cornerstone of Malaysia’s auto market as they accounted for half of all the cars sold here.
However, AmInvestment Bank observed that both were starting to see sales moderating after a slew of new launches in the second half of 2016.
Affin Hwang Investment Bank Bhd (AffinHwang Capital) highlighted that Proton Holdings Bhd’s (Proton) sales of 7,200 units in May brought the first five months (5M17) sales to a total of 32,200 units.
“This represents an 11.8 per cent y-o-y increase but continues to fall short of its 120,000 sales target for 2017,” the research firm said, adding that Proton recently launched its new Proton Iriz in June 2017.
Meanwhile, AffinHwang Capital noted that Perusahaan Otomobil Kedua Sdn Bhd’s (Perodua) sales of 17,200 units brought 5M17 sales to 81,900 units.
The research firm further noted that Perodua is on track to achieve its 2017 sales target of 202,000 units from the two new facelifts introduced in 2017 – Axia (January 2017) and Bezza (April 2017).
As for foreign car makers such as Honda, Hong Leong Investment Bank Bhd (HLIB Research) highlighted that YTD, it recorded strong sales of 43,700 units.
HLIB Research believed Honda is likely to outperform its targeted 100,000 sales, driven by new launches of high volume models such as the new BRV, City facelift and Jazz facelift in 2017.
HLIB Research also highlighted that YTD, Toyota achieved sales of 28,400 units and is on track to achieve its target 68,500 sales in 2017. This is banking on the launch of a facelift model and a few new variants in 2017, the research arm observed.
Nissan did not fare as well compared to its counterparts, recording YTD sales 10,800 units, a 36.1 per cent decline y-o-y.
“The weak Nissan sales is unsurprising, given lack of new models and stiff competitions from new models introduced by other original equipment manufacturers (OEMs),” the research arm said.
New beginnings for Proton
Partnership with China’s Geely will open regional doors
DRB-Hicom’s recent definitive agreement signing with China’s Zhejiang Geely Holding Group (Geely) is perhaps the biggest gamechanger in the auto sector this year.
As Geely takes 49.9 per cent equity in Proton, many viewed this as a positive move which will likely open more doors for Malaysia’s first carmaker.
In a media release, DRB-Hicom highlighted that on the same day, the group also sold its entire stake in Lotus Advance Technology Sdn Bhd (Lotus) to Geely and Etika Automotive Sdn Bhd.
This strategic move could not have come at a better time for the flailing national carmaker.
According to AmInvestment Bank, Proton is in especially dire straits, having seen six consecutive months of either zero or negative growth on a month on month (m-o-m) basis to April.
“It has been a passive player in the auto sector despite seeing a consecutive drop in numbers for its passenger cars since November last year, while the reception for the Proton Ertiga MPV (launched in late November) was lukewarm at best,” the research firm said.
“Positively, it launched a facelift of the Proton Iriz to catch the pre-Hari Raya boom.”
DRB-Hicom group managing director Datuk Sri Syed Faisal Albar pointed out that with Geely on board, Proton can now eye the huge Asean passenger car market with renewed confidence.
Syed Faisal however said that their immediate focus is to re-claim their position as Malaysia’s best-selling car.
“Proton’s status as a National Car is secure, with DRB-Hicom still a majority shareholder. Proton will now focus their efforts with Geely to gain market share domestically.
“With the joint capabilities of both companies, I am positive that we will be able to impact the market posively, by coming out with products that meet market preferences in terms of design and quality,” he added.
As for the sale of Lotus, this marked DRB-Hicom’s exit from the sports car segment.
Syed Faisal said the sale allows Proton to focus on passenger cars, which is a larger market.
Following the definitive agreement signing, Syed Faisal said at a press conference that Geely would inject RM170.3 million in Proton and set up a sport utility vehicle or suburban utility vehicle (SUV) platform for Boyue with an implied value of RM290 million.
In a filing on Bursa Malaysia, DRB-Hicom revealed that as part of the subscription price, Geely has granted the licence to Proton (without the right to sub-licence) to manufacture, sell, market and distribute the Boyue Model under the Proton brand for the term set out in the Boyue Licensing Agreement within the right-hand drive markets in Brunei, Indonesia, Malaysia, Singapore and Thailand (Boyue Licence) pursuant to the Boyue Licensing Agreement.
DRB-Hicom noted that the Boyue Licensing Agreement will be effective from the completion of the share subscription agreement (SSA). The group further noted that the cash subscription and the Boyue Licence total RM460.3 million.
According to DRB-Hicom, in its home country, the Geely marque sold some 760,000 cars in 2016, doubling the figures from the year before.
“The growth rides on the popularity of the SUV segment, with Geely’s Boyue SUV proving to be very popular in China,” the group said.
“Geely sold 109,000 units of Boyue in 2016, and until May this year, 103,000 units have already been sold.”
AmInvestment Bank believed that the SUV segment offers strong growth potential as neither of the national carmakers (Proton and Perodua) has produced an SUV.
Meanwhile, Public Investment Bank Bhd (PublicInvest Research) was particularly positive on the rebadging of Geely Boyue as it is the first-ever SUV line up for Proton.
“We understand that Boyue was designed by a former Volvo designer,” PublicInvest Research said.
“If it is priced competitively, we believe Boyue could gain market share from current SUV models that are available in our local market. However, the timeline for its expected launch date has yet to be finalised.”
On the other hand, the research arm of Kenanga Investment Bank Bhd (Kenanga Research) opined that while Geely is more popularly known for its successful acquisition of Volvo, the ability of Geely to assist Proton from technical and marketing perspective as well as to penetrate new markets remains a concern.
This is considering that Geely is also a relatively weak brand from a global perspective with a global market share of less than five per cent, Kenanga Research said.
“Proton still has to deal with the challenges posed by increasing competition and a weak brand perception,” the research arm added.
“The outlook for DRB-Hicom remains challenging given the tough operating environment of lower sales of motor vehicles amidst stiff competition.”
On concerns from the local car industry regarding the impact of the strategic partnership to local vendors, especially once the business restructuring of the partnership takes place, Minister of International Trade and Industry, Datuk Seri Mustapa Mohamed said in a Bernama interview that DRB-Hicom has given an assurance that in selecting Geely as its partner, it has taken into account all such issues.
“While local vendors are still expected to meet stringent quality, cost and delivery measures to ensure the competitiveness of Proton, they are also open to other opportunities created from the partnership.
“These include technical cooperation to enhance capabilities, possible participation in Geely’s supply chain and being able to export regionally,” Mustapa explained to Bernama.
As for the criticisms against this strategic partnership, Bernama was quick to point out that what is important now is that there is an economic solution to rescue Proton out of its financial mess created by a business model that was unsustainable in its early years.
Overall, Bernama noted that this partnership would not only bring about good business opportunities for both companies, but contribute to the revival of the Malaysian automotive industry and emergence of indigenous brands, regionally.
“Like many other international auto joint ventures, Proton’s partnership with Geely is a norm in the industry and purely a commercial decision that would undoubtedly serve the best interest of the company, its vendors and employees,” it opined.
Perodua fares well
Group plays second to none in regional export plan
Fellow national carmaker Perodua has generally fared better compared to Proton, analysts observed.
Ministry of International Trade and Industry’s Mustapa told Bernama that Perodua was currently doing very well with domestic sales of 207,110 units last year with 35 per cent share of the overall total industry volume, putting Perodua as market leader in the local motor vehicle industry.
Perodua was also developing an export plan to widen its market in Asean, Organisation of Islamic Cooperation countries and Africa, he added.
“Perodua already exports close to 5,000 units yearly to Sri Lanka, Indonesia, Fiji, Brunei and Mauritius.
“Also, it is working to get our local vendors to participate in the supply chain of Daihatsu,” he added.
For the first quarter of 2017 (1Q17), Perodua exported 941 vehicles to six countries, which was a decrease of 41 per cent from 1,600 vehicles in the same quarter last year.
Despite the shortfall in export so far this year, Perodua president and chief executive officer (CEO) Datuk (Dr) Aminar Rashid Salleh Aminar said that Perodua relatively positive to achieve its export target of 5,000 units in 2017, which is almost the same figure as 2016.
“We aim to steadily grow our regional reach as we further improve our operations to become globally competitive,” he said.
Mustapa went on to say in an interview with Bernama that the introduction of the Bezza model last year and its positive reception, demonstrated the Perodua’s capability in venturing to other segments.
In fact, Bezza was part of the reason why Perodua saw a steady increase in vehicle production year on year (y-o-y)
According to Perodua, it produced 49,218 vehicles in 1Q17 against 48,300 vehicles in the same quarter of 2016.
“The increasing number of vehicle produce is due to a high demand of our new Axia Facelift and Bezza,” the group said.
The Bezza model’s upper body was styled and developed completely in-house by Perodua.
Additionally, Bernama pointed out that Perodua has more than 100 local vendors to participate in the manufacturing of parts and components to meet its needs.
“These initiatives are a testament to Perodua’s commitment to move up the value chain and its ability to be globally competitive.
“Perodua’s business model to tie-up with Daihatsu has proven to be successful and it must continue to undertake aggressive exports promotions to market its cars abroad,” Mustapa said.
Generally, Perodua is cautiously optimistic of achieving its sales target of 202,000 units for the year.
“We also foresee that despite the challenges in the automotive industry, there will be modest growth for the industry this year,” Aminar projected.
What’s in it for 2H17?
With all this in mind, how will carmakers fare for the rest of the year?
AmInvestment Bank has projected TIV growth of two per cent in 2017 to 592,000 units, based on the sales performance of the first five months of 2017, and five per cent for 2018 to 621,000 units as a result of the low base.
As for AffinHwang Capital’s 2017E TIV sales of 592,000, up two per cent y-o-y, it remained intact, supported by new-model launches in the pipeline.
“The stronger TIV growth is premised on the recovery in the local ringgit spurring consumer spending,” the research firm said.
It has however noted that loan-approval rates for new-vehicle purchases will likely remain a challenge.
Meanwhile, HLIB Research maintained its 2017 TIV assumption of 600,600 units, up 3.5 per cent y-o-y, as the research arm expected slower growth in the second half of 2017 (2H17) due to high base effect.
Kenanga Research also left its TIV forecast of 590,000 unchanged given the lack of re-rating catalyst for 2017 as automobiles purchases have been clamped by stringent lending guidelines as well as consumer sentiment lingering at level below the optimistic threshold on higher living expenses.
“Additionally, the recent strengthening of the ringgit against US dollar-Japanese yen is still insufficient to cushion the negative impacts on automakers,” it said.
The research arm expected improvement in consumer spending levels in early 2H17 to lead the recovery of the sector with the recent model launches and forthcoming model launches such as the new Perodua Myvi, face-lifted Perodua Bezza, Honda Jazz Hybrid, Honda CR-V, new Toyota CH-R, Toyota Hilux 2.4G, Toyota Vios 2017, face-lifted Toyota Camry, Mazda CX-5 2017 and Mazda CX-9.
“Companies have traditionally focused their additions onto the second half of the year to gear up for seasonally stronger demand in the last two quarters,” AmInvestment Bank observed.
“Major companies that have slated new models to be launched in the later part of this year included Toyota (which has
resolved to offer more energy efficient vehicle (EEV) cars to gain price competitiveness) and Mazda (its flagship model, the new CX-5 is marked for September).”
Aside from this, the research firm did not discount the possibility of new launches by Perodua and Nissan.
AmInvestment Bank noted that the Perodua Myvi could see a revamp as its last significant update was a facelift on the second-generation Myvi in early 2015, and given that the 2017 Proton Iriz facelift has just made a move to corner the market for cheap 1.3L hatchbacks.
“In the case of Nissan, its distributor had planned to bring in new models only in 2018 soonest but we believe that it could move earlier to save the massive decline in its sales,” the research firm said.
On a side note, Kenanga Research highlighted that the weakening of ringgit against major currency has been hampering the profitability of the OEM players, in contrast with the replacement equipment manufacturer (REM) players which are more focused on overseas market and benefitting from the weakening of ringgit.
“Moving forward, to lessen the impact of the unfavourable forex and declining domestic TIV volume, the equipment manufacturer are looking to boost their export sales by participating in various international automotive exhibitions and also engaging with relevant government agencies to facilitate expansion strategies,” it said.