Due to be released next week, we expect its 2QFY20 CNP to chalk between RM40m-RM45m, bringing 1HFY20 to RM90.5m-RM95.5m, which we deemed as within our estimate at 41%-43%, but below consensus expectation at 36%-38%, of full-year estimates. Nevertheless, we feel positive on its 2HFY20 prospect which could be better than the first half, riding on the recently launched facelifted/turbo CX-5, the all-new CX-8, and all-new CX-30. We reiterate our OP call with a TP of RM2.75 on above-industry profit margin and steady dividend yield of c.8%.

Expecting another weak quarter. Results are due to be released within next week; we expect 2QFY20 CNP to come in between RM40mRM45m (-21% to -11% QoQ, -46% to -39% YoY). We attributed this to the weaker local Mazda sales at 2,454 units (-15% QoQ; -49% YoY), based on MAA data, after: (i) back-orders filled from the zero-rated tax discount period, particularly for its outgoing CX-5, (ii) expected lower associates’ contribution from the lower production volume as Mazda Malaysia S/B (MMSB) ceased outgoing CX-5 production since July 2019, but starting August 2019, it has switched production to the all-new CX-5 and all-new CX-8, and (iii) order delivery delayed for the all-new CX-5 and all-new CX-8 due to pricing approval issues. Last year was also seen as a strong base benefitting from back-logged order delivery for zerorated tax holiday sales. Our assumption for 2QFY20 CNP is based on vehicles’ average selling price for the past three quarters. Note that, c.67% of the 1QCY20 unit sales was contributed by the all-new Mazda CX-5. This will bring 1HFY20 to RM90m.5-RM95.5m, which we deemed as within our expectation at 41%-43%, but below expectation at 36%- 38%, of full-year estimates. The group’s 1HFY20 local Mazda sales is 5,714 units (-24% YoY), based on MAA data. We feel positive on its 2HFY20 prospect which could be better than the first half, riding on the recently launched face-lifted/turbo CX-5 (22nd October) and the all-new CX-8 (13th November) as well as supported by the all-new CX-30 (CBU, 20th November).

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 18 dealerships in CY18. Note that its 60.4%-owned BAUTO Philippines is still experiencing volatile sales volume in 1QCY20 at 527 units (-18% QoQ, -34% YoY).

Exciting new launches starting 2QFY20. BAUTO has launched the allnew Mazda 3 Sedan and Hatchback (CBU, July), face-lifted and turbo variants of CX-5 (CKD, 22nd October), all-new CX-8 (CKD, 13th

November), and all-new CX-30 (CBU, 20th November). BAUTO will introduce the face-lifted CX-3 (by Dec 2019/1QCY20) and all-new Mazda MX-30 (CKD based on demand) which was introduced at the Tokyo Motor Show (estimated launch in CY2020/CY2021), and tentatively in two formats; (i) full EV, and (ii) range extender powered by a small rotary engine (necessary for other markets where daily commutes are longer or Malaysia which lacks EV infrastructure).

Maintain OUTPERFORM with unchanged TP of RM2.75 based on 13x CY20E EPS (at -0.5SD of its historical 3-year Fwd. PER mean). We like BAUTO for its: (i) expected earnings recovery from the stream of all-new models, (ii) superior margins, above industry peers (average profit margin of c.9% vs. peers of c.2%), and (iii) steady dividend yield of c.8%.

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

Source: Kenanga Research - 3 Dec 2019