Automotive Sector - Expecting 3M23 4W sales growth to sustain

Solid Jan ‘23 4W sales (+11.8% yoy) and bookings during IIMS event is indicating resilient domestic auto demand. Despite we might see slower Feb ‘23 sales (as historical seasonality has proven so), both car sales in Feb ‘23F and 2M23F growth are likely to remain healthy. Continuing positive catalysts on EV development will also boost mood demand. In all, we view growth will normalize this year and rising policy rate transmission pace to car loan yield will become the main key, aside from purchasing power and car loan appetite demand. Maintain OW on Auto sector and BUY on ASII with SOTP target price of IDR7,350 (10.2x ‘23F P/E) which now trading at below -1SD 10-yr hist mean. Feb ‘23 sales growth will remain healthy despite lower mom After reporting better-than-expected FY22 sales, Jan ‘23 4W sales continue to book solid growth at 11.8% yoy. While we believe this is triggered more by inventory sales discounts rather than additional demand, this should be translated as a solid foundation to starting 2023. We acknowledge that February sales is cyclically proven to be lower mom. With the assumption of 5 years average Feb sales of -2.8% mom, Feb ‘23 sales could arrive at 91,491 units and this still mark a 13.0% yoy growth. Even assuming the cyclical declining Feb sales at -7.0% mom (the worst monthly Feb sales growth in 10 years), Feb ‘23 sales growth will remain healthy at 8.03% yoy or equal to 87,495 units and bringing 2M23 sales to 181,582 units (+10.0% yoy). 3M23 contribution to FY could be higher, while 6M23 will be similar with 6M22 Historically, total 3M sales to full year contributes an average of 28%. Using the same hypothesis whereas Feb ‘23 sales drop by -2.8% yoy and Mar ‘23 sales will flat mom, cumulative total car sales in 3M23 will equal to around 277,069 units or contributes around 28.7% to our 2023F car sales (excluding car sold in IIMS event) and this is still 3.5% higher compared to 3M22 contribution to FY22 of 25.2%. We also make another simulation to measure the continuing concern over the negative impact on rising car loan yield to car sales and found that for longer period (1H23), total 4W sales could come in surprise and contributes approximately 44.8% to FY23 or slightly similar to that in 1H22 which contributes 45.3% to FY22. Various catalyst to offset car loan yield re-pricing While car loan yield re-pricing might somewhat jeopardize demand, we think continuing promotion (free spare parts and services up to 5 years), huge discount, low down payment (as low as 0%) and lengthened installment period (up to 96 months, whereas in pre-Covid era mostly 60 months) will be able to offset the negative impact on demand and help total car sales to arrive at similar figures with FY22. Additionally, car loan growth has been growing at healthy level at 6.7% yoy and 2.4% mom for 2W, while for 4W grew by 13.6% yoy and 2.2% yoy in Dec ’22 which already reflect the loan yield repricing as consumer loan rate in Dec ‘22 stood at 10.3%, only 60bps below pre-Covid level of 10.9%. Uninterrupted effort to accelerate EV industry development We like the government’s commitment to support EV (Electric Vehicle) penetration through incentive that will be implemented on 20 March 2023. With the requirement of having local content (TKDN) of 40% and more, the subsidy of IDR7 mn will be given to 2W buyer. Yet, for this year it is limited to only 200,000 units of new electric motor cycle and 50,000 units of conversion. For electric car, despite it came in the form of tax cut (VAT cut to 0% vs conventional car at a minimum of 15%) and certificate of vehicle ownership (BBNKB) to 0% from up to 90%, the overall benefit from tax incentives for electric car is equal to 32% from its price tag (2W is around 18%). We also think the latest continuing effort to accelerate the development of EV industry in Indonesia and its supporting ecosystem would underpin growth and could boost better demand, going forward. Expecting positive impact to Astra auto segment Resilient automotive industry will play important role in supporting Astra auto segment. Despite we expect softer earnings due to muted CPO outlook and lower coal price expectation, we view the above simulation should impact positively to Astra auto segment. We expect 1Q23F auto segment will contribute around 21.4% to FY23, while on 1H23F portion which around 44.6% to FY23 (1H22 at 44.2%) or IDR4.48tn, equal to 4.9% yoy growth. Maintain Overweight Ceteris paribus, we might see vehicles loan demand to withstand and overall 4W sales growth could arrive at above 5-year historical CAGR prior Covid of 0.4%. Maintain our OW stance on the sector and BUY ASII with an SOTP TP of IDR7,350/share (10.9x ‘23F PE). Risks to our call includes: a) lower-thanexpected 2W and 4W sales growth b) higher and faster than expected rising policy rate transmission c) higher inflation, slowing economic activity and d) deteriorating spending confidence.