Due to be released next week, we expect its 1Q20 CNP to chalk between RM45-50m, which we deemed as below our/consensus expectation at c.17-20% of full-year estimate, due to weaker-than-expected local unit sales. As such, we cut FY20E/FY21E CNP by 17%/5% and our TP to RM2.75 (from RM3.00). BAUTO will be launching the face-lifted/turbo CX-5 and all-new Mazda CX-8, which should drive the remaining quarters’ sales. Coupled with above-industry profit margin and steady-dividend yield of 7%, we maintain our OP call.

Expecting a weaker 1Q20. Results due to be released within next week; we expect 1Q20 CNP to come in between RM45-50m, weaker compared to RM60.1m in 4Q19 (-25%/-17% QoQ), but comparable to RM50.3m in 1Q19 (-10%/-1% YoY). We attributed this to the weaker local Mazda sales at 2,880 units (-4% QoQ; -14% YoY), based on MAA data, after fulfilling back-orders from the zero-rated tax discount period, particularly for its outgoing CX-5, as well as expected lower associates’ contribution from the lower production volume as Mazda Malaysia S/B (MMSB) has ceased outgoing CX-5 production since July 2019, but with sufficient supply to cater up to September 2019. Our assumption for the 1Q20 PATAMI is based on vehicles’ average selling price for the past three quarters. Note that, c.60% of the 4Q19 unit sales was contributed by the all-new Mazda CX-5. Nevertheless, we expect its sales volume to recover with the incoming face-lifted and turbo variants of CX-5 (CKDopen for booking-launching on 30th Sept), and all-new Mazda CX-8 (CKD-launching on 1st Oct) which should drive the remaining quarters’ sales. Note that last year, 1Q19 was affected by the supply constraint from 30%-owned associate, MMSB, due to the unexpected surges in demand for passenger cars during the zero-rated tax holiday.

Challenging outlook in Philippines operation. BAUTO’s Philippines market will continue to be impacted by the Tax Reform for Acceleration and Inclusion (TRAIN) law, effective since January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, higher car prices, thus affecting the demand for motor vehicles in the Philippines. BAUTO plans to preserve its sales volume by increasing its dealerships there to 21 by the end of CY19 from the 18 dealerships in CY18. Note that its 60.4%-owned BAUTO Philippines is still experiencing volatile sales volume in 4Q19 at 643 units (-37% QoQ, -36% YoY).

Exciting new launches starting 2Q20. BAUTO has launched the allnew Mazda 3 Sedan and Hatchback (CBU) in July 2019. Looking forward, BAUTO will launch its popular face-lifted and turbo variants of CX-5 (CKD launching on 30th Sept, tentative pricing range at RM133k- 180k), and all-new Mazda CX-8 (CKD launching on 1st Oct, tentative pricing range at RM180k-210k). BAUTO is also looking to bring in the allnew CX-30 (CBU from Thailand) and face-lifted CX-3 (CBU) in Dec 2019. BAUTO will introduce another new model (CKD) that will be introduced at the Tokyo Motor Show on 23rd October 2019 (estimated launch in CY2020/CY2021).

We cut FY20E/FY21E CNP by 17%/5% to reflect lower-than-expected unit sales. As such, we cut our TP to RM2.75 (from RM3.00) based on 13x CY20E EPS (at -0.5SD of its historical 3-year Fwd. PER mean. However, we still like BAUTO for its: (i) expected earnings recovery from the stream of all-new models, especially from its popular, face-lifted/turbo Mazda CX-5, (ii) superior margins, above industry peers (average profit margin of c.9% vs. peers of c.2%), and (iii) steady dividend yield at 7%.

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

Source: Kenanga Research - 5 Sept 2019