Kenanga IB Downgrades Auto Sector - Subsidies, Speculation & Stagnation

Malaysia’s automotive sector is entering a more cautious phase after a lacklustre quarter weighed down by intensifying competition from foreign brands and operational challenges across the board.

Kenanga Investment Bank (KIB) has downgraded its outlook on the sector from “overweight” to “neutral”, signalling continued headwinds as the market heads into 2025.

KIB expects a “two-speed” market to persist. The affordable car segment is likely to remain steady, as its core buyers—the B40 and lower-tier M40 groups - are expected to be largely insulated from the RON95 fuel subsidy rationalisation.

This group could also benefit from the upcoming progressive wage model, potentially boosting their spending power and supporting vehicle demand.

In contrast, the mid to premium segments may struggle. KIB has downgraded Sime Darby and DRB-Hicom to “underperform”, citing ongoing challenges and persistently weak margins.

However, MBM Resources and Hong Leong Industries are seen as bright spots. Both are well positioned within the affordable segment and are set to benefit from the fuel subsidy reform. Attractive dividend yields of 8% and 5% respectively make them even more appealing to investors.

Hong Leong Industries in particular delivered stronger-than-expected earnings, thanks to ramped-up production of new motorcycle models, strategic price adjustments, and a shift toward premium bikes with better margins.

On the other hand, Bermaz Auto saw its profit halve. Despite early gains from distributing Xpeng electric vehicles (EVs), it continues to face stiff competition in the non-national car space. There are also looming currency risks, especially if the Japanese Yen appreciates under a more hawkish Bank of Japan.

KIB projects total industry volume (TIV) for 2025 to hit 805,000 units, only slightly below 2024’s actual figure of 816,474 units. This is expected to be driven by forward buying of EVs before the postponed excise duty takes effect at year-end.

Perodua is expected to retain its dominant 44% market share, supported by strong local content, attractive new models, and a resilient labour market. Unemployment is forecast to drop to 3.2% in 2025.

In the premium segment, rising living costs may prompt upper M40 and T15 buyers to delay purchases or shift towards more fuel-efficient vehicles like hybrids and EVs. With electricity tariffs for high-usage households set to rise by 14%, there could also be growing interest in solar energy—which in turn supports EV adoption.

EVs remain attractive for their lower long-term maintenance costs compared to internal combustion engine (ICE) vehicles, thanks to fewer moving parts and less wear and tear.

The government’s push for EV adoption is gaining momentum, backed by tax incentives for both imported (CBU) and locally assembled (CKD) EVs. Malaysia is aiming for EVs and hybrids to account for 20% of total vehicle sales by 2030, rising to 38% by 2040. However, at Caricarz we believe this aim is only achievable if the tax incentives are extended.

While KIB forecasts that EV charging infrastructure will double to 10,000 stations nationwide by the end of this year, we believe this is an optimistic projection that merely echoes government goals.

In reality, data from MEVNet shows that the number of registered EV charging bays (EVCB) currently stands at only 3,611. This indicates a significant slowdown in infrastructure rollout, and it's becoming clear that hitting the 10,000-station target may not be realistic.

Charge point operators (CPOs), much like car brands, are hesitant to commit further investments without long-term policy clarity or stronger government direction.

At Caricarz, we feel KIB’s shift to a neutral sector stance is fair, reflecting the current challenges in the market. However, the full impact of the RON95 subsidy removal remains highly uncertain.

So far, policymakers have delivered nothing but mixed signals. The latest statement from Prime Minister Anwar Ibrahim assures that RON95 prices will not rise for Malaysians and will only affect foreigners and a small group of the ultra-wealthy.

Yet, as we reach the midpoint of 2025, no concrete policy or implementation mechanism has been outlined - aside from a vague mention of using MyKad at the fuel pump. Until firm decisions are made, the true impact of subsidy rationalisation remains in a “no man’s land”.

Source: The Edge