Investment Highlights

• We maintain our BUY call with an unchanged FV of RM2.60/share on Bermaz Auto (BAuto) based on an FY19F PE of 14x.

• We identify the key items to observe in coming quarters, following its strong 1QFY19 results:

1. The group will try to reduce its dependence on sales of the CX-5 over time. This model accounted for 70% of Mazda sales amid strong sales of ~680 units/month and softening sales of other models such as the M2 and CX-3. The launches of the CX-3 and M6 facelifts in mid-Aug are expected to lessen its dependence on the CX-5.
2. Immediate sales still anchored to meeting unfulfilled orders comprising mostly of the CX-5. We understand that at least 70% of the 6K units in the waiting list for Mazda here comprises the CX-5, and buyers may have to wait for 2019 to receive their new CX-5 or CX-3. This pent-up demand serves as the foundation for BAuto’s sales in the coming months, as most buyers would have bought their cars during the tax holiday and that the final quarter of the year is usually seasonally weaker one.
3. The lower Mazda prices with the SST compared to the GST is expected to provide at best a small nudge for sales. The two CKD models were cheaper (CX-5 by up to 2.1%, M3 by up to 1.7%) as the SST rewards localization with exemptions and rebates. Apart from this, two CBUs were substantially cheaper (CX-3 down 4.6% and MX-5 down 5.8%) as the later versions received from Japan were priced lower than their predecessors.
4. Associate earnings from MMSB expected to improve. MMSB was hit in 1QFY19 as it was taken by surprise with the zeroization of the GST. We understand that production has normalized since August and it has been able to chart a stronger return to exports (which has long been identified as the key catalyst for the unit), after prioritizing the local market in recent months.
5. We remain relatively conservative on the Philippines as its auto sector remains sullen. We project for a sales growth of 10% YoY to 5.7K units (FY17: 5.2K/+25% YoY). Sales should improve from the low of 800 units in 1QFY19 with the new CX- 3, but the sector is still struggling with the higher excise taxes imposed in Jan (Jan-Aug sales of passenger cars in the Philippines fell 21% YoY).

• We remain assured of the group’s plans to hold up sales in a challenging environment. Earnings projections should improve when it divulges details for the localization of the CX-8 presently eyed for late 2019.

Source: AmInvest Research - 10 Oct 2018