Solid Chassis, Bumpy Ride

We initiate coverage on Cycle & Carriage Bintang Bhd (CCB) with a HOLD rating and target price of RM1.95, based on 0.7x CY18E book value. CCB is the oldest Mercedes-Benz (Merc) dealer in Malaysia with the largest network of 13 sales / services outlets. In 2017, competition among Mercedes dealers heated up and CCB lost market share. Management has since undertaken aggressive marketing campaigns / promotions and raised its capex, which will suppress 2018-20E earnings, in our view. We believe the challenging business outlook is largely priced-in (share price -33% yoy) and CCB’s current valuation of 0.7x P/BV, 2SD below its 5-year historical mean, looks fair.

Merc Remains Top in Class, But Growth May Take a Break in 2018

After recording another round of record sales of 12.3k units in 2017, we believe Merc would continue to lead in the non-national luxury segment on the back of continuous demand for luxury cars that meet the lifestyle requirements of city dwellers. However, we believe Merc unit sales in 2018 will be similar as last year’s given that the model pipeline from Merc is expected to be limited. More importantly, we do not expect CCB to gain market share, within the brand.

CCB Combats Competition With Aggressive Expansion

Despite CCB’s sales track record, competition from other dealers has eroded the Group’s sales market share (and profit) from 42% in 2015 to 37% in 2017. To remain relevant in the local Merc ecosystem, CCB will continue to refurbish all Autohauses over the next 3 years, to comply with the Mercedes-Benz Presentation System (MPII) and to reflect the new Merc Corporate Identity (CI). Besides that, the Group aims to solidify its footprint in the Southern region of Klang Valley through its Cheras outlet (completed in 1Q17) and establishing another 3S outlet at the Sungei Besi site by 2020 to cater to expected corporate demand from the upcoming Bandar Malaysia.

Initiate Coverage With a HOLD Rating, TP RM1.95 Based on 0.7x P/B

We initiate on CCB with a Hold rating and target price of RM1.95 based on 0.7x FY18E book value (2SD below 5-year mean), implying a 2019E PER of 14x, which we believe is fair. Upside risks: stronger-than-expected sales / profit margins; downside risks: further decline in market share.

Source: Affin Hwang Research - 3 Apr 2018