‘Price hike inevitable for most cars in Malaysia’

(The Borneo Post) – The possibility of a further price hike across the board in Malaysia’s automotive sector is inevitable given the current currency situation, analysts say.

One such example is national carmaker Proton Holdings Bhd who yesterday said it may have to increase its car prices after Chinese New Year (CNY) in February with the rising costs of imported parts due to the depreciating ringgit.

“The ringgit level now is lower as compared with a year ago, which has affected our imported parts prices,” chief executive officer Datuk Harith Abdullah said to reporters after a ceremony marking the appointment of new dealers.

This sentiment was further affirmed by the research wing of MIDF Amanah Investment Bank Bhd (MIDF Research) who highlighted that the weak ringgit is expected to have a more pronounced impact on sector earnings in the forecasts for financial year 2016 (FY16F).

“To give a perspective, US dollar to ringgit averaged at circa 3.90 to 4.00 year-to-date but spot rate now stands at 4.38 (this will be largely reflected in the first half of 2016 or 1H16).

“Second, hedges at lower rates would have expired and new hedges would eventually reflect higher exchange rates. After a 44 per cent earnings contraction in FY15F, sector aggregate earnings is expected to decline further by three per cent in FY16F.

“The earnings contraction is buffered by our expectation of a hike in pricing, but any worse than expected volume impact underpins our bearish view on the sector,” the research team pointed out.

It noted that Berjaya Auto Bhd (BAuto) retained its status quo on its pricing, consistent with its guidance, while Tan Chong Motor Holdings Bhd (Tan Chong) and Mitsubishi Malaysia had hinted of a price increase late last year.

“Tan Chong is also heavily exposed to the US dollar and we think a price hike is inevitable. Tan Chong’s operating margins had already shrunk from a steady state six to eight per cent to as low as three to four per cent currently, even after the rolling back of heavy discounting last year,” MIDF Research added.

It further said Toyota and Honda – the two largest non-nationals with a combined 28 per cent market share – have both officially announced price increases recently, and of the two, UMW Toyota saw the bigger quantum of increase, which is between 3.1 to 8.6 per cent, while Honda announced a 2.77 to 2.83 per cent increase.

The price of the Camry Hybrid however is maintained at RM174,900 while Toyota’s volume driver, the Vios (which is estimated to account for 29 per cent of Toyota total industry volume or TIV), saw a three to four per cent increase while the largest increase was seen for the Hilux model, which is six to nine per cent, the research team explained.

“Honda, which we understand transacts mainly in yen (versus a 100 per cent US dollar exposure for UMW Toyota), saw a pretty uniformed price increase across all its models,” it added.

“While the price increase announced by Toyota and Honda was expected since last year, the quantum of increases seems to be smaller than earlier indications of up to 16 per cent.

“On our estimates, the price increase would only offset 34 per cent of the impact of the ringgit weakening since January 2015 (for UMW Toyota). As a recap, the ringgit has depreciated by some 25 per cent against the US dollar since January 2015.

“We estimate that if UMW Toyota were to fully offset the impact of the weaker ringgit over the past 12 months, average pricing had to be raised by an average 15 per cent against the base 2015 pricing – which is triple the estimated average five per cent hike that was implemented,” MIDF Research said.

Overall, the research team believed that the price hike is positive as it helps to offset skyrocketing cost from a weak ringgit.

However, it remained wary of the negative impact on TIV, amid an already weak consumer sentiment and the drying up of the market from consumers bringing ahead purchases in the fourth quarter of 2015 (4Q15).

As for the national car segment, the research team said, it is still uncertain whether Perodua would impose a price hike this year, though both national cars hinted of this in late 2015.

“Recall however that Perodua had selectively increased pricing for its Axia model, specifically, the Axia G 1.0 by RM990 (an increase of three per cent) in October 2015, from RM32,637. The second round of increase was RM1,500 (an increase of 4.5 per cent) but this came with the inclusion of an ABS (Antilock Braking System) system for this variant.

“Since its launch in late 2014, the Axia has become Perodua’s largest volume driver accounting for 48 per cent of its TIV,” it added.

All in, it maintained a ‘neutral’ view on the auto sector given the persistently weak ringgit and a muted demand outlook.