We came away from a meeting with CEO Dato’ Francis Lee, feeling positive on its 2HFY20 prospect which could be better than the first half, riding on the recently launched face-lifted/turbo Mazda CX-5 and the all-new Mazda CX-8 which are expected to drive 55-60% of total local sales and also generate better export sales to the Philippines. We reiterate our OP call with a TP of RM2.75 on above-industry profit margin and steady-dividend yield of 7.4%.

Mazda CX-5 and CX-8 to drive local sales. BAUTO recently launched its popular face-lifted and turbo variants of Mazda CX-5 on 30th September 2019 (CKD), and all-new Mazda CX-8 on 1st October 2019 (CKD) which are expected to drive 55-60% of the total local sales and also generate better export sales to Philippines. The CX-5 is targeted to register c.7k units/year (current booking at c.500 unit), while the CX-8 at c.2.5k/year (current booking at c.200 unit). Both models are locally assembled at the Inokom plant in Kulim, Kedah with tentative pricing of c.RM137-180k for the face-lifted/turbo CX-5 (previously, no turbo variant at RM133k-RM174k), while the CX-8 will cost 15% to 20% more than the CX-5 CKD at c.RM175- 205k. On the other hand, BAuto and its partners are looking to invest up to RM200m to expand 29%-owned, Inokom’s plant production capacity from 50k to 80k units per annum by 2021/2022 to cater for the growing production demand for the all-new models.

Delay in invoiced sales to 2HFY20, as expected. The final pricing for the 2019 CX-5 and all-new CX-8 is expected to be unveiled within 3 weeks from the launching date pending pricing approval from the government agencies, which could drive most of the invoiced sales to 2H of the financial year, hence, its 2QFY20 (August-October quarter) sales could post weaker/flat sales. Nevertheless, overall results are expected to be cushioned by stronger associates as BAUTO switched production to the all-new CX-5 and all-new CX-8. The Inokom plant has started production of its latest Mazda model in August 2019. Note that, the recent 1QFY20 results was affected by the weaker gross profit margin following the outgoing Mazda CX-5 run-out promotion as more sales incentives were given to clear inventories of this model. However, this was cushioned by stronger associates’ contribution due to the ramp-up in production for the outgoing Mazda CX-5 volume (ready stock up to September 2019) after ceasing the outgoing CX-5 production in July 2019.

Dividend pay-out of at least 80% of PATAMI. BAUTO is committed to delivering dividend pay-out of at least 80% of PATAMI which translates into dividend yield of c.7-8%. BAUTO has been paying an average dividend pay-out of c.90% of PATAMI for the last five years.

Exciting new launches starting 2QFY20. BAUTO has launched the allnew Mazda 3 Sedan and Hatchback (CBU) in July 2019, its popular facelifted and turbo variants of CX-5 (CKD, 30th Sept), and all-new Mazda CX-8 (7-seater SUV, CKD, 1st Oct). BAUTO is also looking to bring in the all-new CX-30 (CBU from Thailand) and face-lifted CX-3 (CBU) in Dec 2019. BAUTO will introduce another new model (CKD based on demand) that will be introduced at the Tokyo Motor Show on 23rd October 2019 (estimated launch in CY2020/CY2021) which could be an electric vehicle (EV), 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 7.4%. Risks to our call include: (i) lower-than-expected car sales volume, and (ii) unfavourable forex.

Source: Kenanga Research - 8 Oct 2019