- We re-affirm our BUY call on BAuto with a higher fair value of RM3.70/share (vs. RM3.10/share previously). BAuto’s 1Q15 beat expectations. The group reported a 1Q15 core net profit of RM59mil, accounting for 33% and 32% of our and consensus estimates.

- We raise our FY14F/15F/16F earnings by 14%/22%/9% to factor in:- (1) Higher margins from better FOB pricing and sales mix, (2) JPY rates at 3.12-3.13 from 3.18, (3) Higher IAF for the CKD CX5, (4) Better-than-expected volume and margins at Berjaya Auto Philippines (BAP).

- 1Q15 earnings grew 18% QoQ on a 29% QoQ revenue growth (Mazda TIV: +26% QoQ). EBIT margin was sustained at 14%-15% given increased contributions from higher margin CBU models, i.e. the Biante and CBU CX5 (2.5 litre). A positive surprise was: (1) BAuto is getting more favorable FOB pricing from Mazda Japan, which means cheaper CBUs and kits, given tight capacity at the local production plant, (2) Better IAF incentives given improved localisation for the CKD CX5.

- Forex that BAuto locked in is much cheaper than spot and the JPY3.18 (FY15F) that we modeled in previously. Management expects an average JPY3.13 for the majority of FY15 (up till Jan 2015) vs. its own budget of 3.25. Spot rates are now lower at 3.07-3.08 levels, which could spell upside to our FY16F-17F earnings where we conservatively model in rates at JPY3.15.

- The Mazda 3 (M3) CKD is pushed out to Feb 2015 as sales momentum for the CX5 is still strong and management wants to focus capacity for this. The CX5 is still churning a 3-month waiting list (1.6K booking bank) despite production improving to 500-600/month from 400/month last quarter. Inokom is undertaking a paintshop upgrade in Oct 2014 which raises annual capacity to 20K from ~12K for Mazda.

- BAP earnings grew 22% QoQ driven by strong demand for the Mazda 2 and Mazda 3. Margins are set to improve given incentives from Mazda Japan, i.e. circa USD500/car, on top of more competitive CBU pricing. Sales network will increase by 3-5 outlets to 17-19 by end-FY15F to capitalise on strong underlying demand there. Management’s volume target is raised to 3.5K from 3.2K previously (FY15F).

- The 6% GST means cheaper cost for BAuto (vs. 10% SST) in FY16F. While auto demand is at risk from inflation, BAuto’s niche in the higher segments lowers risks of its buyers being affected. Furthermore, it has little exposure to A/B segments, which are most impacted by competition currently.

- BAuto is deeply undervalued at just 10x CY15F earnings (well below sector CY15F PE of 12x) despite strong earnings outperformance, net cash position (RM195mil) and a 23% 3-yr EPS CAGR. Key near-term catalysts: (1) Potential M&A to expand manufacturing presence, (2) Inokom capacity expansion, (3) Mazda 3 CKD in Feb 2015.

Source: AmeSecurities