We maintain our SELL rating on Cycle & Carriage Bintang (CCB) with an unchanged TP of RM1.18, based on 0.4x 2020E book value. We expect CCB’s profitability to remain under pressure due to: (i) intense competition from other luxury brands (eg. BMW); (ii) competition from the other Merc dealers, (iii) higher capex and opex due to the building of the Sungei Besi outlet, and (iv) aggressive marketing campaigns / promotions. That said, the relatively higher margins from new model launches in 2019-20E should help cushion some of the margin erosion.

Mercedes-Benz Is Gradually Losing Its Grip on the Crown

We expect CCB to report a lower 2019 revenue relatively to the high base in 2018, when sales were boosted by a tax holiday. In 5M19, the total sales of Mercedes Benz (Merc) in Malaysia (by CCB and other dealers) slipped by 3.5% yoy to 5.0k units. Meanwhile, Merc’s main competitor, BMW, has increased its 5M19 sales by 6.5% yoy to 4.6k units (including sales of the Mini). BMW has launched everal new models (ie. BMW 3 Series, BMW 8 Series and BMW X5) in 2019. To keep BMW at bay, Mercedes-Benz Malaysia will be launching a fresh line-up of some 20 models in 2019.

Intense Competition Among the Merc Dealers

Meanwhile, the competition among Merc’s authorised dealers is also intense. Despite the strong competition among Merc dealers, CCB maintained its market share at 36% in 2018 (2017: 36%) but was unable to regain her crown as Merc’s top dealer in Malaysia. The Group will continue to refurbish and expand its customer touchpoints nationwide to support Mercedes-Benz Malaysia (MBM)’s network development and in alignment with Daimler AG’s global MAR2020 corporate identity standards.

Maintain SELL Rating and Unchanged 12-month TP of RM1.18

We maintain our earnings forecasts and reaffirm our SELL rating on CCB given its challenging 2019-20E earnings outlook. Our TP of RM1.18 is based on a 0.4x (close to 2SD below 3-year average) 2020E book value. Upside risks: stronger-than-expected sales or profit margin; easing of competition among dealers.

Source: Affin Hwang Research - 25 Jun 2019