Analysts: Strong cross winds ahead for automotive sector
KUCHING: The automotive sector’s total industry value (TIV) is expected to be supported by strong backlog orders but analysts are cautious on the sector’s outlook given the numerous headwinds in 2023.
In a report, the research team at RHB Investment Bank Bhd (RHB Investment) pointed out that while 2H22F TIV and earnings should be supported by strong backlog orders, it foresee numerous headwinds in 2023 that could weigh on car sales including softening orders, potentially lower loan approval rates, higher car prices, and weakened consumer purchasing power.
“We believe that new orders have likely weakened in July and will stay subsided in the following months, as months’ worth of orders have been brought forward to June, given it was the last window of opportunity to take advantage of the Sales & Services Tax (SST) exemption.
“Orders should gradually recover towards the end of the year, mainly driven by new car launches, facelifts, and seasonal discounts,” it said.
However, it pointed out that the rising overnight policy rate (OPR) may dampen demand.
“A higher OPR would translate to higher fixed rates on new hire purchase (HP) loans, raising the cost of financing car purchases. Consequently, banks will likely turn more cautious and auto loan approval rates may fall,”
RHB Investment said.
It explained that between May 2011 and June 2014, when OPR was raised to three per cent, the average approval rate fell to 51 per cent.
While it noted that the average monthly TIV for the latter period was 16 per cent higher compared to the former period, the average GDP growth in the latter period was 5.3 per cent compared with a 1.5 per cent contraction in the first period.
“Nevertheless, we believe that a higher OPR will likely translate into higher interest expense on HP loans, making it more expensive and difficult for some customers to service.
“Consequently, we believe that banks will turn more cautious, potentially leading to lower HP loan approval rates,” it opined.
Meanwhile, it also believed that car prices could gradually inch up.
“Faced with costlier car parts, the principals and distributors could use new models and facelifts to raise car prices to pass on higher input costs.
“Moreover, customers now have to bear the SST – 10 per cent for both CKD and CBU models. Additionally, the excise duty reform may raise car prices by eight to 20 per cent in 2023. That said,
we note that the managements of the national marques are wary that they have limited room to raise car prices,” it said.
Furthermore, at multiyear highs, Malaysia’s core inflation could rise further as the government moderates the extent of subsidies.
“In our view, because car purchases are discretionary, when faced with rising living costs and higher car prices, consumers that are more price sensitive may be more inclined to withhold non-essential purchases.