Investment Highlights

• We maintain our BUY call on Bermaz Auto (BAuto) with a higher fair value of RM1.80/share (from RM1.74/share previously) as we roll over our valuation to FY22F with a PE of 13x and after tweaking our earnings estimates higher. We have assigned a 3-star ESG rating on BAuto.

• We raise our FY22–23F net profit forecasts by 3% and 8% respectively after factoring in additional sales and earnings contribution from its joint venture with Kia Motors.

• Yesterday, BAuto announced that it has formed a strategic partnership with Kia Motors Corporation (Korea) to manufacture, assembly and distribute Kia vehicles in Malaysia. A new company, to be known as Kia Malaysia, will be formed to undertake the assembly of Kia CKD vehicles in Malaysia.
   
• We note several key highlights:

1) For the manufacturing segment, BAuto’s portion under the JV structure would be 33.3% while the remaining portion would be owned by Kia Motors (Korea). This entity will be known as Kia Malaysia Sdn Bhd (KMSB). BAuto’s paid-up capital for this portion is RM20.0mil. Kia Motors intends to make KMSB the regional manufacturing hub for Asean and other potential markets.

2) For the distribution segment, BAuto will hold the majority stake of 65% under a company called Dinamikjaya Sdn Bhd. BAuto’s total paid-up capital for this portion is RM3.25mil. This entity would be the sole distributor of Kia vehicles in Malaysia, taking over from Naza Kia.

3) The first two CKD models slated for production would be the Kia Carnival MPV (4QCY21) and the Kia Seltos SUV (2QCY22). The third unnamed CKD model will be determined at a later stage. From our findings, currently the Kia Carnival MPV is priced from RM160K to 189K while the Kia Seltos SUV is priced from RM116K to RM134K.

4) All the manufacturing and assembly activities will be done in BAuto’s 29%-owned Inokom plant. The current manufacturing capacity of the said plant is 30.0K units. As upgrading works on the plant are in progress, total capacity of the plant will eventually be raised to 80.0K (on a two-shift basis) after completion in 4QCY22.

5) Historically (from MAA stats), total Kia sales volumes in Malaysia are as follows: 5.7K units in 2018; 3.4K units in 2019 and 759 units in 2020. Management aims to sell about 2.0K units in FY22F and 5.0K units in FY23F (vs. our assumption of 800 units for FY22F and 2.5K in FY23F).

• Overall, we are positive on this development as we think that this will anchor BAuto’s foothold as a stronger nonnational auto player with two prominent brands under its belt. While it was guided that earnings contribution “would not be much” in FY22F, we believe that this would augur well for the group’s next phase of growth in the medium to long term.

• We are also excited on the third potential Mazda CKD programme (after the CX-5 and CX-8) will come to light soon (from our ground checks). We understand that the third Mazda CKD model would make its debut in 4QCY22.

Source: AmInvest Research - 2 Apr 2021