Despite support from the Jakarta auto show, four-wheel (4W) wholesale sales declined by 5 percent month on month (mom) and by 16 percent year on year (yoy) to 88,000 units in October (table 1), according to sales figures released by the Association of Indonesian Automotive Manufacturers (Gaikindo).

The October sales were lower than our expectations. Based on our channel check, October retail sales were even weaker than the wholesale ones, as purchasing power has remained low. Thus, we expect 4W monthly sales to remain challenging in the following months.

In October, Astra International'€™s (ASII) market share hovered around the 51.7 percent level (as compared to 51.4 percent in September this year and 47.3 percent in October, 2014), with monthly sales at 45,600 units, a 4 percent mom decline and 8 percent yoy decline. We believe that the performance of ASII'€™s new products, the Toyota Avanza and Daihatsu Xenia, were disappointing as monthly sales remained weak and discounts have been quite generous so far in November.

Nissan booked sales of 1,400 units in October, declining by 17 percent mom and by 51 percent yoy, as Indomobil (IMAS) attempted to lower its inventory level of low-margin products with steep discounts.

Competition in the multi-purpose vehicle (MPV) segment has intensified as discounts for the three most popular models, Toyota Avanza, Daihatsu Xenia and Honda Mobilio, increased at the beginning of November.

On the flip side, prices in the city car and low cost green car (LCGC) market, such as the Toyota Agya and Suzuki Wagon, have increased as demand moves to this market given the decline in purchasing power. Toyota Innova increased its sticker price by Rp 5 million (about US$365), with the net price increasing by Rp 35 million on the launch of its new models.

Based on numbers from the Indonesian Motorcycle Industry Association (AISI), in October domestic motorcycle (2W) sales reached 603,000 units, with a flat mom figure but an 11 percent decline yoy (table 2). We believe that the stronger 2W performance was due to the strong popularity of Honda'€™s 2W sales (ASII) as the company booked improved sales of 454,000 units, and registered a 7 percent mom increase and a flat yoy, representing a higher market share of 75.3 percent (as compared to 70.5 percent in September, 2015 and 67 percent in October, 2014).

Given the challenging economic outlook and continued low farmers'€™ incomes due to low commodity prices, we expect 2015 domestic 4W sales to reach 1.02 million units (a 16 percent yoy decline) and domestic 2W sales to reach 6.4 million units (19 percent yoy drop), with flat 2016 volumes for both segments; we expect purchasing power to only recover in the latter part of 2016. For ASII, we expect a lower 4W market share due to the tight competition, but a higher 2W market share after the launch of several new products. As for IMAS, new dealership developments and a weak market share should lead to margin pressure. Thus, at this stage of the market cycle, we retain our '€˜underweight'€™ sector call on Indonesia'€™s automotive industry. For ASII, we maintain our '€˜reduced'€ rating with a slightly higher sum-of-the-parts (SOTP)-based target price (TP) of Rp 5,550, with low earnings prospects.

For IMAS, we repeat our '€œreduced'€ rating and discounted cash flow (DCF)-based TP of Rp 2,000 due to the continued difficult outlook. For PT Gajah Tunggal (GJTL), we retain our '€œbuy'€ rating with a higher DCF-based TP of Rp 860 with an improving performance ahead. Risks to our ratings are higher margins for ASII, increased auto sales for IMAS, and a weaker rupiah for GJTL.
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The writer is a senior research manager at PT Bahana Securities

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