Economic relaxation measures positive for automotive sector, says MIDF Amanah Investment Bank
16 Aug 2021
The announcement on economic relaxation measures, including the reopening of non-essential manufacturing sectors including auto and component plants starting today, is a positive development for the automotive sector.
MIDF Amanah Investment Bank said yesterdays’ announcement by the government is significantly positive as it essentially means the entire automotive value chain would be back in operations this week onwards.
However, it said the reopening of auto manufacturing plants is subjected to the workforce full dose vaccination rate of a minimum of 40 per cent to 59 per cent, which allowed up to 60 per cent operating capacity, whereas those with 60 per cent to 79 per cent and 80 per cent to 100 per cent fully vaccinated workforce are allowed to operate at 80 per cent and 100 per cent capacity respectively.
“For auto retailing, states that the outlet is operating in is required to have achieved a minimum 50 per cent vaccination rate while customers are required to have been fully vaccinated,” it said in a research note today.
It said according to selective listed players, their workforce inclusive of plant workforce are already more than 90 per cent fully vaccinated, which is well higher than the respective state-level vaccination rates.
“However, we understand part of the workforce may still need to complete the 14-day post-second dose requirement, suggesting production may see gradual ramp-up from now till end-August,” it said.
On a positive note, it said the completely-knocked-down (CKD) kits are now well in stock, given that shipments were still incoming despite the lockdown, which should support a production ramp-up to partly recoup production loss in the past two and a half months.
“Secondly, outstanding orders are strong (with two to four months of outstanding bookings prior to the lockdown) while pent-up demand is likely to return supported by the tax holiday which runs till Dec 31, 2021.
“Thirdly, we see room for auto plants to increase production shift cycles once they meet full operating capacity requirements by end-August,” it said.
Finally, it said Klang Valley, one of the key demand centres that accounted for 41 per cent of the total industry volume (TIV), has achieved 64.7 per cent vaccination rate which should enable a meaningful return of consumers to showrooms.
In total, it said states that have achieved more than 50 per cent vaccination rate accounted for 53 per cent of TIV.
The investment bank said the longer than expected lockdown presented a slight downside risk to its 2021 TIV forecast of 550,000 units but the resumption of sector operations now improve visibility and remove an overhanging concern on the sector’s recovery prospect.
“Furthermore, impact of the lockdown on our forecasts should be limited to 2021 from production loss, whereas demand remains intact at this juncture backed by strong outstanding orders.
It said the simultaneous reopening of auto retailing should accommodate further build-up of outstanding bookings underpinned by the tax holiday until year-end, cash transfers under the fiscal stimulus programmes and a low-interest-rate environment.
“These factors, coupled with potential improvement in the macro environment post-reopening, underscore our ‘Positive’ view on autos as a recovery play,” it added.