• Kia Motors and Bermaz Auto formed a JV partnership - Kia Malaysia Sdn Bhd (67:33% split) for the production & assembly of Kia marques
• Concurrently, Bermaz’s 65%-owned Dinamikjaya Motors was appointed as the new distributor of Kia vehicles in Malaysia
• We are positive on the latest development but expect Kia contribution to only likely see material contribution from FY23. We raise FY23E EPS by +6.3% and maintain BUY with a higher TP of RM1.66 (15x CY21E PER)

33%-owned JV Kia Malaysia Set to Undertake Production & Assembly

Bermaz entered into a JV agreement w ith Kia Motors Corporation (Kia Corp) to undertake the production and assembly of Kia vehicles – w ith the intend to cater for both local and regional markets, via the new ly incorporated Kia Malaysia Sdn Bhd (KMSB). KMSB w ill have an initial share capital of RM3,000 comprising 3,000 ordinary shares at RM1.00 each, w hereby Bermaz and Kia Corp w ill hold a 33% and 67% stake respectively. Depending on future funding requirements, the issued share capital of KMSB w ill be increased to RM60m comprising 60m ordinary shares at a later stage. Bermaz w ill fund its 33% portion of RM20m from internally generated funds (net cash of RM354m as at 31 Jan 2021).

… while 65%-owned subsidiary Dinamikjaya Motors handles local distribution

Concurrently, Bermaz’s 65%-ow ned Dinamikjaya Motors Sdn Bhd (DMSB) was appointed as the new distributor of Kia vehicles in Malaysia. DMSB holds the right to distribute both Kia CKD and CBU models, sale of genuine parts as w ell as provision of after-sales services in Malaysia. Alongside the appointment of DMSB as a Kia distributor, Bermaz entered into an agreement for the subscription of a 65% stake in the enlarged issued share capital of DMSB for RM3.25m. The balance 35% are held by other promoters and shareholders w ho are also involved in the w holesale and retailing of motor vehicles in Malaysia.

Three CKD Models in the Pipeline

KMSB has three models in the plans, namely Kia Seltos, Kia Carnival and the third model to be determined at a later stage. We gather that CKD production for the Kia models are expected to start end-2021, w ith the first model to roll out in early-2022. Meantime, the group may also introduce some CBU models by end-2021, albeit models yet to be determined.

Targeting Around 2,000-2,500 Unit Sales for FY23

Based on data from MAA, the Kia marque sold on average c.4,400 units in Malaysia over the past 3 years (ex. year 2020 w hich w as impacted by MCO), w ith its peak hitting 9,900 units back in 2014. Upon the staggered launch of all three models by 2022, the group guided for a relatively modest sales target of 2,000-2,500 units possibly by FY23E. Hence, w e expect immediate term FY22E to only see modest contribution from Kia, before a more significant portion kicking in by FY23E. Based on our estimates, w e expect a potential incremental net profit contribution of c.RM5m for FY23E, based on 2k units and its 65% stake. We assumed a modest net profit margin of 4% - low er than Mazda’s past 2-year average net margin of c.6.5%, considering low er economies of scale in the initial phase.

Potential Incremental Associate and JV Profits Via KMSB and Inokom

CKD production for Kia vehicles w ill be manufactured under Bermaz’s 29%-ow ned Inokom plant, w hich has a 30k units/year capacity. Current utilisation for the plant is around 50%, w ith Kia expected to gradually provide a modest boost from end-2021 onw ard. While Kia Corp intends to make KMSB the regional manufacturing hub for its Kia brand of vehicles in ASEAN, w e expect the initial stages to be largely concentrated on local deliveries of around 2k units. Coupled w ith KMSB’s associate profit, w e estimate total associate contribution to potentially see incremental profits of c.RM4m, assuming 2k Kia unit deliveries for FY23E.

Maintain BUY; Positive on Further Brand Diversification

Accordingly, w e raise our longer-term FY23E earnings by +6.3%, inputting contribution from Kia, but maintain FY22E as contribution may yet to be significant in the immediate term. Meantime, w e raise our target PER to 15x (from 14x previously), near its 5-year mean, reflecting the brighter prospects given the diverse brand offerings for the group – having now secured the Kia distributorship on top of Peugeot in December 2020. All in, w e reiterate our BUY rating, w ith a higher TP of RM1.66 (from RM1.53).

Key downside risks: i) supply constraint on Mazda models, (ii) forex risks, and (iii) prolonged lockdow ns.

Source: Affin Hwang Research - 2 Apr 2021