After the strong contribution from MMSB in FY18, the growth momentum will continue over the next two years on the ramp-up of production from more new models. On the newsflow on tightening of rules for import cars, it is highly unlikely that imported cars from ASEAN and Japan will be slapped with import duty as they are currently exempted from it based on the FTAs. Maintain BUY and target price of RM2.60, based on 13x 2019F PE. The stock also offers attractive yields of 6.4-7.7% for FY19-21.

WHAT’S NEW

30%-owned MMSB going strong. Mazda Malaysia SB’s (MBSB) contribution to Bermaz Auto (BAuto) in FY18 saw a 154% yoy increase to RM52.3m on the back of a 40% growth in production volume to 14,871 units. Moving forward, we believe the growth momentum will continue as BAuto is targeting production volume of 18,000-19,000 units in FY19 and 24,000-25,000 units in FY20. MMSB’s current capacity stands at 31,000 units per annum. We gather that 40% of the production volume is planned for the domestic market, while the remainder will go to the ASEAN region, notably Thailand.

BAuto’s absorption of SST for vehicles booked before, but delivered after, 1 Sep 18 not necessary a bad move. BAuto announced recently that it will absorb sales tax for vehicles booked before 1 September but delivered after the date. We note that this is not necessarily a bad move as management aims to sustain the sales volume recorded during the 3-month tax holiday until Dec 18 (which is the estimated timeline of the delivery of backlog orders). After accounting for cuts in spending on advertising, promotions and incentives, we estimate a RM10m-15m impact from the move but we note that the figure could be lower as BAuto should benefit from improved operating leverage from high sales volume vs low sales volume (in the case of passing on the 10% sales tax on 1 Sep 18).

National Automotive Policy under review; potential tightening of rules for import of foreign cars. Prime Minister Tun Dr Mahathir mentioned that the government may consider restrictions on foreign car imports to allow national cars such as Proton to dominate the local market. We note that most vehicles are already assembled here locally. For 6M18, car production in Malaysia stood at 280,947 units (vs 6M18 TIV of 289,714 units). In addition, there is currently no import duty imposed on complete built-up (CBU) cars and complete knockdown (CKD) kits imported from ASEAN and Japan under the respective free trade agreements (FTA). BAuto currently imports its CBU vehicles and CKD kits from Thailand and Japan, which are exempted from import duty.

STOCK IMPACT

Car prices to be 1-3% higher post reintroduction of a 10% sales tax on 1 Sep 18. We gather from management that BAuto will be absorbing the 1-3% increase in its car prices on 1 Sep 18. To recap, BAuto hiked prices of its CX-5 (accounting for 57% of FY18 Malaysia sales volume) by RM1,000-2,000 in Jan 18. Hence, we opine that the absorption of a 1-3% increase in its car prices will have, at worst, a modest impact to its margins.

All-new Mazda 6 to hit the Malaysian market in 3Q18 while the CX-8 will only debut in CKD form in late-19. The all-new Mazda 6 will be in CBU. Meanwhile, the CX-8, Mazda’s first 7-seater SUV, will only launched in CKD form in late-19 as opposed to the initial plan of launching the CBU form first in early-18. The indicative CKD pricing is estimated at RM200,000, and will be competing against the Toyota Fortuner (priced at RM169,800- 195,800), and the Mitsubishi Outlander (RM132,000-146,000).

Facelifted CX-3 to be launched next week, all-new CX-3 only in 2020. Despite the removal of a powered sunroof, the faceliftted CX-3, priced at RM121,134 (on-the-road without insurance), comes with many safety features such as electronic parking brake, blind spot monitoring, etc. On the all-new CX-3, we gather that it will be powered with the nextgeneration Skyactiv-X engine.

BAuto to stop CKD assembly of Mazda 3 by 1Q19, CX-8 to be the replacement. The Mazda 3 accounted for 17% of the group sales volume in FY18. Currently, only two models are being locally assembled, which are the Mazda 3 and CX-5.

Listing of Bermaz Auto Philippines (BAP) pending. Management is still trying to list BAP on the Main Board of the Philippines Stock Exchange but there is no definite timeline for now. Announcement will be made once BAP re-files its listing application.

EARNINGS REVISION/RISK

No change to our earnings forecasts.

VALUATION/RECOMMENDATION

Maintain BUY and target price of RM2.60, based on 13x 2019F PE.

Attractive yields of 6.4-7.7% for FY19-21. Given BAuto’s net cash of RM261.5m (or 23 sen per share) and asset-light business model, we estimate a 75% payout for FY19-21, which represents attractive yields of 6.4-7.7%. For the past three years, BAuto’s payouts ranged from 86% to 115% of headline net profit.

SHARE PRICE CATALYST

Sharp decline of the Japanese yen against the ringgit. We estimate every 10 sen change in 100JPY/RM will impact BAuto’s net profit by approximately RM3m.

Market share gains from competitors.

Source: UOB Kay Hian Research - 2 Aug 2018