Following our meeting with management, we remain positive on BAuto’s outlook on the attractive model line-ups of CX-5 facelift, new CX-8, CX-3 facelift and new CX-30 in 2019 as well as another new SUV model in 2020, which will support its sales in Malaysia and Philippines. We are not overly concern on the impact of JPY appreciation, given BAuto operations are mainly denominated in MYR (CKD units from MMSB). Maintain BUY recommendation with unchanged TP of RM2.85, based on PE 14x of CY20 profit.

1QFY20 earnings recap. BAuto recorded a decent 1QFY20 core profit of RM52.5m, a drop of 13.7% QoQ due to higher sales incentives to clear inventory of the outgoing CX-5 model, but a growth of 5.7% YoY on higher contribution from associate Mazda Malaysia (MMSB) on higher production volume of CX-5 model.

Promising new models. BAuto is expected to launch an upgraded facelift version of CX-5 model with a new variant equipped with 2.5 turbo engine by end Sep 2019 and the highly anticipated all new CX-8 model in early Oct 2019. Both models will be CKD version, assembled by MMSB in Inokom facility. Concurrently, both models are also export models (by MMSB) to regional ASEAN market. Henceforth, management is upbeat with the earnings uplift from these models. Sales volume will be further substantiated by follow up launches of CX-3 facelift and all new CX-30 (both CBU) by end of 2019 and potentially another new SUV model in 2020 (to be reviewed in upcoming Tokyo Motor show in Oct 2019).

Malaysia… Mazda sales volume is expected to be supported by upcoming new launches (CX-5, CX-8, CX-3 and CX-30) with margins improvements towards 2HFY20 (1QFY20 margins was subjected to the higher sales incentives). Management is confident with the positioning of the more premium perceived Mazda models as indicated by the sustainable sales volume of CX-5 and revealed that majority sales volume came from the higher-end variant.

Philippines… TIV has started to normalize with 1H19 sales growth of +1.87% YoY, indicating potential recovery of consumer sentiment since effective implementation of TRAIN tax in 2018. 60% owned BAP is expected to ride on the trend of recovery with the attractive line-up launches i.e. new Mazda 3, CX-5 facelift, new CX-8, CX-3 facelift and new CX-30.

JPY impact. Impact from JPY appreciation (against RM and PHP) is limited to CBU units as CKD units (in Malaysia) are price transferred at RM4/JPY100 from MMSB. Given 70-80% of Malaysia sales are CKD units, BAuto margins are relatively shielded from JPY fluctuations. On the other hand, MMSB exposure towards JPY is also partially hedged by its export sales to regional market, where sales price is also denominated in JPY.

Dividend. Management remains committed to the company’s dividend payout (BAuto had been distributing more than 90% of its profits for the past 4 years). BAuto has always been operating in a lean and asset light structure with minimal capex requirement. Furthermore, there is potential dividend flow-up from 30% owned MMSB, which is sitting in a net cash pile of RM300m.

Forecast. Unchanged.

Maintain BUY, TP: RM2.85. We maintain BUY recommendation on BAuto with unchanged TP of RM2.85, based on CY20 P/E of 14x, supported by: (i) healthy balance sheet with net cash position of RM188.5m (16.2sen/share); (ii) attractive line up models to sustain sales volume; and (iii) high dividend yield of 5.5-7.5%.

Source: Hong Leong Investment Bank Research - 27 Sept 2019