We anticipate 1H19 PATAMI to come in at c.63% of both our/consensus full-year estimates, buoyed by the stronger Malaysian units sales of 8,132 units (+65%), which we deemed to be within expectations as we expect sales to normalize in 2H19. BAUTO recorded an all-time high for quarterly Malaysian sales in 2Q19 from the supply recovery after a constraint during the first two months of the zerorated tax holiday. Reiterate OP with unchanged TP of RM2.50

Expect 1H19 to be within expectations. We expect 2Q19 PATAMI of RM77.9M (+55% QoQ, +251% YoY) buoyed by the all-time high for quarterly Malaysian sales in 2Q19 at 4,802 units (+44% QoQ, +89% YoY) mainly due to supply recovery of the all-new CX-5 after a supply constraint (under 30%-owned associates, Mazda Malaysia S/B (MMSB)) during the first two months of the zero-rated tax holiday. The 2Q19 and 1H19 results are due to be released by mid-December 2018. Our assumption for the 2Q19 PATAMI is based on the vehicles average selling price for the past three quarters. This implied 1H19 PATAMI of RM128.2M (+202% YoY) which is at c.63% of both our/consensus full- year estimates. We expect sales to normalize in 2H19 after the surge in delivery of the back-logged all-new CX-5. Note that, the group 1H19 Malaysian units sales is at 8,132 units (+65%), based on data from Malaysian Automotive Association (MAA).

Philippines operation challenging outlook. According to an announcement to Bursa Malaysia, BAUTO has decided not to proceed with the proposed listing of the 60.4%-owned, BAUTO Philippines due to the current challenging situation in Philippines. Note that last year, BAUTO announced the deferment of the listing date to an unspecified date due to regulatory issues. We understand that the challenging situation in Philippines was due to the implementation of the Tax Reform for Acceleration and Inclusion (TRAIN) law in January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, increased in car prices, thus affecting the demand for motor vehicles in the Philippines. Nevertheless, BAUTO plans to preserve its sales volume by increasing its Philippines dealerships to 21 from the current 18 dealerships by the end of FY19 with target to maintain its FY18 units sales level of c.5,000 units/year.

Outlook. BAUTO will maintain its zero-rated pricing for vehicles booked before 1st September 2018 (new SST implementation) and expects better sales in FY19 mainly from the all-new Mazda CX-5 CKD units (back- logged booking of 4k units), while supported by its other variants. For CY18, BAUTO recently launched the face-lifted Mazda CX-3 and face- lifted Mazda 6 (CBU), while for CY19, BAUTO is expected to introduce the new generation of its flagship models of Mazda 3 and all-new Mazda CX-8 CKD in 2HCY19.

Maintain OUTPERFORM with an unchanged TP of RM2.50 based on 13x CY19E EPS, which is at undemanding valuation of -1.0SD of its 3- year forward historical mean PER compared to average net profit growth of 30% for the next 2 years.

We like BAUTO because for its: (i) solid earnings recovery with the launch of its flagship model, the all-new Mazda CX-5, (ii) superior margins, which is head and shoulders above industry peers (average profit margin of c.8% as compared to peers’ average at c.2%), and (iii) steady dividend yield at 7%.

Risks to our call include (i) lower-than-expected car sales volume, and (ii) unfavorable forex.

Source: Kenanga Research - 06 Dec 2018