Initiatives to spur auto, autoparts segment

Analysts laud the sales tax holiday for passenger cars as one of the initiatives under the latest National Economic Recovery Plan (Penjana) stimulus package, but forewarn that total industry volume (TIV) will likely stay pressured.

Under the incentive, the current 10 per cent sales tax (SST) will be fully exempted for completely knock down (CKD) models while completely built up (CBU) models will enjoy a partial 50 per cent exemption.

The SST exemption will run for a period of 6.5 months from June 15, 2020 till December 31, 2020.

MIDF Amanah Investment Bank Bhd (MIDF Research) pegged the incentive as timely, having seen significant deterioration in car sales following the Covid-19 lockdown measures and its impact on macro conditions.

“The dire need of an incentive similar to the 2018 tax holiday is consistent with our argument back in April, when we turned negative on the sector,” it said in a sector review yesterday.

“Savings from the SST exemption is likely to be fully passed on to consumers. Our preliminary checks with selective players over the weekend suggests a range of two to nine per cent reduction in selling price as a result of the SST exemption.

“As a cross check however, during the three-month tax holiday period in 2018, car prices were reduced by 5.6 per cent off the prior Goods and Services Tax (GST) based pricing, but the reduction against the indicative SST-based pricing was lower at two to five per cent.”

The current version of vehicle SST is calculated after imputing the ex-factory cost (or docket price for CBUs) and the related import duties, excise duties and Industrial Linkage Program incentives – as models with lower localization attracts higher effective excise duties – there is thus a snowball impact on the SST amount payable.

Given that effective SST chargeable is technically higher for models with lower localisation, MIDF Research said the price reduction from the sales tax holiday is expected to be larger in absolute terms for such models, relative to a similar model with a higher local content.

“Non-national CKDs typically entail lower localisation rate of 40 to 70 per cent versus up to 95 per cent for the national makes, hence we expect the former to enjoy larger price reductions,” it continued.

“Given this positive development, we raise our FY20F TIV to 554,433 units from 504,580 units previously. We now expect FY20F TIV to contract by a much smaller 8.3 per cent year on year (y-o-y) compared to the previously expected 16.5 per cent contraction.”

On the other end of the spectrum, Affin Hwang Investment Bank Bhd (AffinHwang Capital) was doubtful that the incentives will be a mega injection to the industry’s TIV.

“While we do not discount that this incentive, coupled with the cheaper oil prices and lower hire purchase loan rates may tempt new-car buyers, we think that the challenging macro environment will see Malaysians deferring purchases of big-ticket items,” it said in a separate note.

“We think Malaysians may even consider commuting with the MY30 unlimited travel pass to cope with the economic shock. Furthermore, we sense that many Malaysians are adapting to the work-from-home setting, hence cars may not be perceived as a necessity in the coming months.”

Affinhwang Capital kept its TIV forecast at 485,000 unchanged as it believed the sales-tax exemptions should limit a sharp contraction in sales as seen in the April TIV figures.

“Notably, the Malaysian Automotive Association has yet to revise its targeted 2020 sales volume of 400,000 units. Its last forecast was post the Covid-19 pandemic and the resulting Movement Control Order which clobbered Malaysia’s vehicle market.”

Source: The Borneo Post