Investment Highlights

• We maintain a BUY and FV of RM2.60/share on Bermaz Auto (BAuto) based on an FY19F PE of 14x.

• Key points from our meeting with management this week:

1) The CX-5 will still lead near-term sales. Feb sales exceeded 1K with about 650 units of the CX-5 sold (it sold an average of 550 units/month from Dec-Jan, exceeding the 500 units/month target).

2) Sales for other key models will improve. Recall that 9M18 Malaysia sales (down 7% YoY) saw the stronger showing by CX-5 and CX-9 offset by weaker ones for the M2, M3 and CX- 3. The M3 and CX-3 with G-Vectoring will enter in April and the lower-spec M2 is eyed for May (to be sold within the RM70-RM75K range, on par with the likes of the Toyota Vios, Honda City and Jazz).

3) FY18 sales on track to meet 11K target, and seeking sales of 13.5-14.5K in FY19.The group will still rely mainly on the M2, M3, CX-5 and CX-3 which together form 90% of domestic Mazda sales.

4) CX-8 to debut with CBU in 3QCY18 and localization to follow in mid-2019. We emphasize that building volume for a new model is a years-long process (CX-8 is also Mazda's first 7-seater), and management's initial guidance is conservative: 150 units/month for Malaysia and 250/month for the Philippines. CX-8 is built on the CX-5 platform and the CKD version will be priced below RM200K. The immediate comparables are the Toyota Fortuner (RM170K-196K) and the Mitsubishi Outlander (RM140K-170K), both of which are locally-assembled.

Sales in Japan have been encouraging: it saw over 12K orders vs. Mazda's target of 1.2K/month, where the CX-8 meets the demand for an affordable 7-seater/3-row SUV to accommodate an extended family (the 2.2L diesel is priced from 3.2mil yen or RM120K).

5) Associate earnings to ride on export growth. Earnings from 30%-owned MMSB rebounded this past quarter and is set to grow with existing exports to certain ASEAN markets and the addition of Iran by year-end. MMSB saw a production volume of 4.6K in 3Q18 and a PAT return of ~RM4K/car (and margin of 4%).

• We believe BAuto is making moves to safeguard both volume and margins in the future. In the near term, it will see support from stronger domestic sales, operating margins and associate earnings from MMSB.

Source: AmInvest Research - 16 Mar 2018