We expect Bermaz Auto (Bauto) to see a moderation in the FY20E sales volume, down 11% YoY from the recent high of 19k units in FY19. Competition from the all-new Proton X70 may steal some pricesensitive consumers away from Mazda’s best-selling model, the CX-5 (68% of FY19 sales volume). As such, we lower our FY21-22E EPS by 10-13%, lower our TP to RM2.60 (from RM3.20) and downgrade Bauto to a HOLD. Bauto’s share price has climbed more than 20% YTD; at a 12x FY20E PER, valuations look fair.

Mazda Car Sales May Slip From the Recent High, But Remain Respectable

Moving into FY20, we expect Mazda sales volume to moderate from its recent high of 19k units due to a lower take-up for Mazda CX-5, as the Proton X70 is luring away some price-sensitive consumers in the crowded compact crossover-SUV market. Also, we think the performance of Bauto’s new model launches in the medium term (ie. all-new Mazda 3, all-new Mazda CX-8, refreshed CX-5 2.5L turbo and all-new CX-30) are unlikely to outdo that of the CX-5 due to higher price points against peers. However, we expect a mild recovery for its 60.4%-owned Bermaz Auto Philippines (BAP) to cushion the blow. To recap, the Philippines’ 6M19 industry sales ended on a positive note (+1.5% yoy to 174k units).

EBITDA Margin Should Gradually Improve, We Believe

We expect Bauto to enjoy EBITDA margins of 12% in FY20-22E underpinned by: (i) a higher-margin product mix, (ii) higher CKD participation, (iii) a strengthening of the RM (vs. Yen) over the long term and (iv) growing contribution of after-sales service/parts.

Quest to Upgrade Inokom Plant for a Third Localisation Programme

Meanwhile, Bauto is eager to catch a 3rd SUV localisation programme, after the CX-5 and CX-8. This will require Bauto and its partners to invest c.RM200m to upgrade the Inokom production facility, which will see a capacity increase to 50k units/annum (from 30k units/annum).

Downgrade to HOLD With Lower TP of RM2.60

We cut our FY21-22E EPS by 10-13% after lowering our sales forecasts and EBITDA margin assumptions to 12% (previously 12-14%). In tandem, we downgrade Bauto to HOLD (from Buy) with a lower 12-month TP of RM2.60 (from RM3.20) based on a 12x CY20E PER (3-year mean fwd. PER; from 14x) as we have turned cautious on Mazda’s near-term sales volume. Key risks to our call: (i) higher/lower-than-expected car sales volume, (ii) supply constraint on Mazda models, and (iii) forex risks.

Source: Affin Hwang Research - 19 Jul 2019