Auto market correction, fierce competition, the growth prospects of auto stocks are waning.

(Kuala Lumpur, 17th) With the revision of the Open Market Value (OMV) pricing and the introduction of targeted RBOB Gasoline subsidies, it is expected that the hot automotive market of recent years will cool down. Along with increasingly fierce competition, next year's automotive sector profit prospects appear dim.

Analysts point out that with the removal of subsidies and pricing revisions, the total auto sales in 2025 are expected to decrease by 4% to 0.755 million units, but this may accelerate the popularization of Battery Electric Vehicles (BEVs).

In terms of brand positioning, the second locally produced autos are expected to continue to lead and dominate the market share.

As for net profit contribution, analysts are bullish on the increased contribution from Sennami, mainly due to the continuous expansion of the product portfolio, aiming for a 3% growth recovery in the auto sector by 2025.

We also expect that the adoption rate of pure electric vehicles will increase in 2025 under the promotion of new car model releases, new entrants, and the increasingly fierce competition among electric vehicle manufacturers.

The tax exemption policy for imported car models will end in 2026, after which domestic assembly will dominate. Despite this, with the support of first-time car buyers and the general public market, the demand for national brands such as Bao Teng and the second domestic brand is expected to remain strong.

The government plans to reserve subsidies for 85% of RON95 users in the 2025 fiscal budget to maintain the affordability of locally produced cars. Therefore, it is expected that national brands will maintain their dominant position, accounting for 65% of the market share in 2025, while non-national brands will account for 35%.

Analysts state that due to intensified market competition and subdued growth prospects, the rating of the Malaysian automotive sector has been downgraded from 'Shareholding' to 'Neutral'.

He expects that the sector's P/E ratio in 2025 will be 9.9 times, 1 standard deviation lower than its five-year average P/E ratio of 12.4 times.

Although this valuation reduction reflects the lukewarm profit growth prospects of the industry and the uncertainty that may arise from the potential cancellation of targeted subsidies, the industry still offers an attractive yield of up to 6.3%.

Analysts indicate that Sime Darby is a preferred stock due to factors such as acquiring UMW to increase net profit, continually increasing exposure to the Australian mining industry, and potentially monetizing non-core assets and land bank reserves.

Of course, there are some catalysts and risks worth paying attention to, including the trends of the US Dollar and Japanese Yen, as well as factors such as interest rate hikes and declines.

Analysts indicate that with the active promotion at the end of the year, the auto sales in the fourth quarter of 2024 are expected to achieve continuous growth, as dealers aim to reduce inventory before the new year.

However, as the tax exemption program is not extended, the total sales are expected to decrease by 1.2%, to 0.79 million units.

Nevertheless, analysts point out that with strong domestic demand, favorable interest rates, and healthy backlogs of orders, the performance in 2024 is expected to be boosted.

As of the end of September, the backlogs of orders for Perodua and Proton are 0.1 million units and 24,000 units, respectively.