- We re-affirm our BUY call on BAuto as the best proxy and immediate-term beneficiary of the new NAP riding on the global rollout of Mazda’s new generation fuel efficient, SkyActiv equipped models which have all been pre-qualified for Malaysia’s EEV program. Our fair value is maintained at RM2.30/share, based on 13x FY15F (YE April) earnings.

- Scope for earnings upside in the immediate-term:- (1) BAuto is applying for a second round of EEV incentives as it increases localisation and qualifies for higher excise duty rebates via the IAF system. The EEV duty incentives that BAuto is currently enjoying are at the mid-to-lowest level of incentives and entail a lot of room to be enhanced; and (2) Potential for further reduction in docket price for Mazda 6, following partial reduction in 2QFY14, which will result in further reduction in excise duties – excise duties for CBUs are charged against docket price which is determined by the customs.

- Introduction of the new generation, SkyActiv equipped Mazda 3 (C-segment sedan and hatchback) is a key near-term volume catalyst. The model will initially be introduced in higher capacity CBU variants within the next one month. A locally assembled 1.5 litre variant will be introduced when it is locally assembled by mid-CY14 and is expected to be priced in the high-volume B-segment price bracket.

- Additionally, the Mazda 6, introduced as CBU in May 2013, will also be locally assembled in 2HCY14, enabling more competitive pricing and incremental EEV tax incentives to kick-in. We project group EBITDA margins to improve to 11% in FY14F from 8% (FY13).

- Meanwhile, production hiccups faced by the CX5 is targeted to be resolved by end-3QFY14F, which will bring production volume up to 1,000 – 1,200 units a month from circa 300 – 400 units a month back in 2QFY14.

- Given that BAuto is mainly exposed to the JPY, the stronger USD will have little impact on earnings, relative to non-national peers – UMW imports entirely in USD while Tan Chong has c.70% import exposure to the USD. The JPY is weakening against the MYR and is a positive earnings catalyst for BAuto. Every 1% change impacts earnings by 6%.

- BAuto is still deeply undervalued at 10x FY15F earnings relative to sector average of 12x given its strong earnings trajectory, status as a proxy to the upcoming EEV program, and exposure to high growth ASEAN auto markets. Key catalysts include:- (1) Launch of CBU Mazda 3 towards 4QFY14; (2) CKD Mazda 3 in 1Q- 2QFY15; (3) Launch of CKD Mazda 6 in 2QFY15, which will be accompanied by exports; (4) Incremental EEV tax incentive application.

Source: AmeSecurities