NOMURA Global Market Research
Indonesia strategy: Outlook 2016 – Time for the big push
Release Date: December 10 2015
The auto sector saw weak demand in 2015, primarily due to slow economic growth, weakness in the currency and dented consumer confidence. Uncertainty around the Fed hike, coupled with China’s RMB depreciation, also added to the pressure, further dampening consumer confidence in the middle to upper class segment, which comprises the majority of 4W buyers.
Since the structural growth story in Indonesia is still in play and it remains a market with long-term potential, industry players prefer protecting market share to maintaining margins. As a result, we continue to witness heavy discounting in 4Ws, especially in light of roughly 460,000 excess units in the market in 2015.
Similarly, 2W purchasing power in the middle to low income segment has also been largely affected by the continued weakness in commodity prices and the fuel hike instituted in late 2014, which resulted in elevated price levels. Low commodity prices have severely affected exports and consequently the purchasing power, especially in areas like Sumatra and Kalimantan.
We expect some gradual recovery in 2016, due to the pick-up in GDP growth from 4.7% in 2015 to 5.2% in 2016, and in part supported by an estimated potential interest rate cut of 50bps by Bank Indonesia in the first quarter. However, our economist has warned that much is still dependent on the Fed rate hike and the subsequent reversal in funds flow.
We expect 4W volumes to grow by a tepid 7% next year from a low base and expect a bit of improvement in operating margins. Meanwhile we also expect the 2W volumes to grow by 5%, as we expect the recovery in the middle to low end will lag that of the middle and middle upper segments, resulting in also a slight improvement in margins.
Even though the recovery is still tentative, we believe the risk to earnings may now be more limited given that the risks of sharply lower volumes for both 2W and 4W, lower dealership margins and lower commodity prices have largely been priced in. As such we retain our Neutral view on the sector. We have Astra Int’l (ASII IJ, TP IDR 5,700) as Neutral, but we have Indomobil (IMAS IJ, TP IDR 2100) as Reduce.