The Malaysian government is gearing up to present Budget 2025 on October 18, with all eyes on the anticipated changes to the RON95 subsidy program. This budget is expected to be a game-changer for the automotive sector, potentially reshaping consumer behavior and industry dynamics in the coming year. As the nation balances economic pressures with its commitment to sustainable transportation, let's dive into the key aspects of this upcoming budget and its implications for the Malaysian automotive landscape.
RON95 Subsidy Rationalization: A Delicate Balancing Act
The cornerstone of Budget 2025's impact on the automotive sector is the expected outline of RON95 subsidy changes. CIMB Securities Research, a prominent financial analysis firm, has highlighted the significance of this move:
"We do not expect any surprises for the auto sector in the upcoming Budget 2025. However, we anticipate the government to provide more details on RON95 subsidy rationalisation implementation," the research house stated.
This subsidy rationalization is more than just a fiscal measure; it's a strategic move that could have far-reaching effects on the automotive industry and consumer behavior. The government's challenge lies in implementing these changes without severely impacting the average Malaysian's purchasing power or dampening the automotive market's momentum.
Potential Impact on Total Industry Volume (TIV)
The automotive industry's performance is often measured by its Total Industry Volume (TIV), and the upcoming subsidy changes are expected to play a crucial role in shaping this metric. CIMB Securities Research anticipates a softer TIV in the last quarter of 2024, primarily due to the government's plans to rationalize fuel subsidies.
However, it's not all doom and gloom. The research outfit points out some potential mitigating factors:
"The introduction of the Employees' Provident Fund Account 3 and salary hikes for civil servants should provide support for new vehicle sales," CIMB Securities Research noted.
These measures could help cushion the blow of increased fuel costs, maintaining some level of consumer confidence in the automotive market.
Driving Towards a Greener Future: EV Adoption Initiatives
While the RON95 subsidy changes might pose challenges, Budget 2025 is also expected to double down on Malaysia's commitment to sustainable transportation. The government's focus on promoting electric vehicle (EV) adoption is anticipated to be a key feature of the upcoming budget.
CIMB Securities Research predicts:
"We expect the government to continue offering tax reliefs and rebates to individuals and investments in new EV infrastructure," highlighting the potential for further growth in the EV sector.
This continued support aligns with Malaysia's Low Carbon Mobility Blueprint, which sets an ambitious target of 15% EV penetration by 2030. The government's commitment to this goal was evident in Budget 2024, which extended personal income tax relief of up to RM2,500 for EV charging equipment until 2027, along with tax deductions for EV rentals.
Current EV Landscape and Future Projections
The push for EV adoption has already shown promising results. In 2023, hybrid and battery EV sales accounted for 4.8% of the TIV, with 45,000 units sold. This significant market share demonstrates the growing acceptance of electric and hybrid vehicles among Malaysian consumers.
As the government continues to invest in EV infrastructure and provide incentives for both consumers and manufacturers, we can expect this trend to accelerate. The automotive industry will likely see a shift in focus, with more resources being allocated to EV development and production.
Navigating Challenges: Economic Pressures and Market Dynamics
While the government's initiatives provide a roadmap for the automotive sector's future, several challenges loom on the horizon. The Malaysian Automotive Association (MAA) forecasts a 4.3% year-on-year decline in TIV for 2024 to 765,000 units. CIMB Securities Research takes an even more cautious stance, projecting a 6% year-on-year drop to 751,000 units.
Several factors contribute to this conservative outlook:
Absence of Sales Tax Exemptions: The removal of these exemptions could increase the overall cost of vehicle ownership.
Potential Higher RON95 Costs: The anticipated fuel subsidy rationalization may lead to increased fuel prices, affecting consumer purchasing decisions.
Increased Competition: The market is seeing growing competition from premium EVs and Chinese original equipment manufacturers.
Inflationary Pressures: The fuel subsidy rationalization could contribute to overall inflationary pressures, potentially dampening consumer sentiment.
Tightening Liquidity: The financial sector has shown signs of tightening, with hire purchase loan approval rates dipping to 58.1% in the first seven months of 2024.
These challenges paint a complex picture for the automotive sector in the coming year. Manufacturers and dealerships will need to adapt their strategies to navigate these hurdles effectively.
Recent Market Trends and Production Dynamics
To understand the full context of the upcoming budget's potential impact, it's crucial to examine recent market trends. In August 2024, TIV experienced a slight dip of 0.8% month-on-month to 71,162 units. This came after recording its highest monthly sales year-to-date in July.
Interestingly, while sales saw a minor decline, production numbers tell a different story. Total production volume rose by 5.2% to 73,966 units, driven primarily by a recovery in national brands. Perodua, in particular, saw an 8.5% month-on-month increase in production to 35,241 units.
This discrepancy between sales and production volumes suggests that manufacturers are optimistic about future demand, despite current market challenges. It also highlights the resilience of national brands in the face of economic pressures.
Commercial Vehicle Sector: A Separate Challenge
While much of the focus is on passenger vehicles, the commercial vehicle sector faces its own set of challenges. The MAA attributed the recent TIV decline partly to weaker commercial vehicle sales. CIMB Securities Research believes this is likely due to the removal of the diesel subsidy in June 2024.
This sector's performance is particularly important as it often serves as an indicator of broader economic activity. The government will need to consider targeted measures to support this crucial segment of the automotive industry.
Investment Outlook: Cautious Optimism
Despite the challenges ahead, CIMB Securities Research maintains an "overweight" rating on the Malaysian auto sector. The research firm cites attractive valuations and dividend yields as key factors supporting this outlook.
While the sector's net profit is expected to decline by 19% year-on-year in 2024, compared to a 25% increase in 2023, there are still reasons for cautious optimism. The sector currently trades at 10.1 times 2025 price-to-earnings ratio, below its five-year mean of 12.5 times. Additionally, it offers potential dividend yields of 6.1% and 6.3% for 2024 and 2025, respectively.
These figures suggest that while the sector may face short-term challenges, it remains an attractive option for long-term investors who can weather the immediate uncertainties.
As Malaysia prepares to unveil Budget 2025, the automotive sector stands at a crossroads. The anticipated changes to the RON95 subsidy program, coupled with the continued push for EV adoption, signal a transformative period for the industry.
Manufacturers, dealerships, and consumers alike will need to adapt to these changes, navigating the challenges of potential fuel price increases while embracing the opportunities presented by the shift towards sustainable transportation.
The government's ability to balance these competing interests – maintaining economic stability, promoting sustainable practices, and supporting a crucial industry – will be key to the success of Budget 2025 and its impact on the automotive sector.
As we await the official announcement, one thing is clear: the coming year will be pivotal for Malaysia's automotive landscape, setting the stage for the industry's long-term evolution in an increasingly electrified and environmentally conscious world.
