Perusahaan Otomobil Nasional Bhd (Proton) and Edaran Otomobil Nasional Bhd (EON)- the two major players in the national car project - appear to be heading toward tougher times in light of declining vehicle sales volume.

At least one research house has downgraded both companies in view of the declining car sales volume, particularly over the last three months. Analysts partly attribute the slump to the government's holding up of the announcement on the new duty structure.

The government was earlier anticipated to announce the tax reduction schedule for the automotive industry within the first quarter of the year. International Trade and Industry Minister Datuk Seri Rafidah Aziz has said the government was finalizing the schedule.

Starting this year, import duties for completely knocked down and completely built-up units of all categories of vehicles from Asean countries will be reduced gradually to 20 per cent in 2005, but accompanied by the imposition of excise tax.

"Potential buyers need to plan their finances and for most people, buying a car is one of the most important choices, apart from buying a house," says an analyst, adding that potential car buyers need to know for certain what is ahead.

Total motor vehicle sales, particularly for the passenger car segment, in the first three months had the brakes pulled and Malaysian Automotive Association (MAA) does not seen significant improvement in new vehicle sales this month either.

The analyst says with the US-led war in Iraq and low consumer confidence in view the Severe Acute Respiratory Syndrome (SARS) outbreak, the failure of the industry to ride on the momentum of last year's historic performance is perhaps understandable.

Total industry volume, as provided by the MAA, of motor vehicle sales in 2002 rose 9.7 per cent year-on-year to 439,954 units - a historical high for the Malaysian motor vehicle industry, replacing the previous high of 404,837 units in 1997.

The deceleration started toward the end of last year, and sales took a turn for the worse when total industry sale in the first quarter 2003 fell 5.87 per cent to 100,022 units from 106,262 units a year earlier.

The impact of the economic condition was greater on passenger car sales, which fell 8.34 per cent to 81,328 units in the first three months of this year, from 88,734 units in the previous corresponding period.

For March alone, the industry's total motor vehicle sales fell 5.54 per cent to 35,130 units from 37,194 units a year earlier. Total passenger car sales for the month fell 7.23 per cent to 28,726 units from 30,968 units a year earlier.

Against this backdrop, AmResearch has cut the volume assumptions and earnings forecasts for Proton and EON. Subsequently, it also downgraded both companies to a hold.

"We are alarmed by the sharp contraction in Proton volumes, particularly EON's sales," says the research house. "Besides the double digit year-on-year volume contraction in the first quarter, its competitors are registering growth."

"Although part of the reasons are due to consumers holding back and lack of new models, the double whammy means that Proton is losing market share at a faster-than-expected rate," it says.

In line with downgrade and the prospective cash per share of RM6.81 (net cash per share of RM5.47) as well as NTA per share of RM8.95, AmResearch lowers its fair value to RM8.00. As at 4 pm on April 22, Proton was down 45 sen to RM6.55 - the year's low.

For EON, the research house says: "In view of the slump in EON sales volumes and delay in the government's announcement on the new duty structure, we have cut our FY03 volume assumption from flat growth to 20 per cent decline year-on-year."

"We have also cut our volume assumption for FY04 from three per cent to 2.5 per cent, but maintaining our FY05 growth assumption at two per cent. Besides that, our margin assumption for the motor operations has been cut from 4.5 per cent to four per cent," says AmResearch.

It says EON should be fairly valued at 4.5 times FY04 earnings versus the sector's average of 6.5 times. "However, we have cut our revised net asset value (RNAV) estimate from RM10.60 to RM9.52 per share to reflect the lower earnings forecasts."

As at 4 pm, EON was up five cent to RM8.80.