BAUTO has entered into an agreement with Kia Motors Corporation (KIA CORP) to undertake the production and/or assembly of Kia vehicles via a new JV company, Kia Malaysia SB (KMSB) at 33.33%:66.67% split between BAUTO and KIA CORP. Concurrently, BAUTO also acquired 65% stake in Dinamikjaya Motors SB (DJMSB) which is involved in the distributorship and sale of parts and provision of aftersales service of Kia vehicles in Malaysia. With earnings impact of less than 1% at the group level, we are long-term positive on this partnership which is expected to be fully operational by end-2021. Maintain MP with a TP of RM1.50.

Investing a 33.33% stake in Kia Assembly JV and 65% in DJMSB. BAUTO has entered into a joint venture agreement (JVA) with Kia Motors Corporation, Korea (KIA CORP) to undertake the production and/or assembly of vehicles under the Kia marque in Malaysia via a new JV company, Kia Malaysia SB (KMSB) with JV ratio split between BAUTO:KIA CORP at 33.33%:66.67%. Initial share capital is at RM3k and will be increased up to RM60m at a later stage depending on funding requirements. On a separate announcement, BAUTO has entered into a subscription cum shareholders’ agreement (Agreement) for the subscription of a 65% stake in Dinamikjaya Motors SB (DJMSB) for RM3.25m cash. DJMSB was recently awarded the distributorship and sale of parts and provision of after-sales service of Kia vehicles in Malaysia. BAUTO will fund its portion of RM20m (33.33% stake in KMSB) and RM3.25m (65% stake in DJMSB) from internal generated funds.

Impacts to financials. The KMSB assembly line will be extended at 29%- owned Inokom’s Kulim assembly plant. Based on our initial estimates, the KMSB assembly line is expected to incur start-up costs of c.RM5m-RM10m based on the three models, which translate to c.RM1.7m-RM3.3m based on BAUTO’s 33.33% stake in the JV. The start-up costs are expected to be netted off by the share of profit from 65%-owned DJMSB distributorship and enhancement in share of profit from 29%-owned Inokom. Overall, we expect the earnings impact to be less than 1% from this venture for the next three years. Additionally, no extra funding is required as any additional funding is expected to be funded through borrowings.

Rationale. The Kia JV represents an opportunity for BAUTO to broaden its group earnings base and to participate in the production and/or assembly (via KMSB) of a renowned Korean marque (Kia) which is targeted for local as well as export market. The DJMSB investment represents an opportunity for BAUTO to acquire a controlling stake in Kia distributorship in Malaysia and complement the upstream assembly activities of Kia vehicles in Malaysia. Currently, there are 34 Kia dealerships (29 3S, 5 2S) under the new distributorship.

New venture expected to produce c.2k units/year (c.15% of Mazda sales). Based on MAA data, Kia sales have been trending weaker since 2014 at highest of 9,926 units and was hit badly by the pandemic to the lowest point of 795 units in 2020. From our understanding, the new venture is expected to initially produce c.2k units/year (c.15% of Mazda sales).

Kia Carnival (initially CBU, CKD by Dec 2021), Kia Seltos (CKD by mid-2022) and 1 new model which could be Kia Sportage (one of the possible models for CKD), which are slated to start production under the new set up. Kia intends to make KMSB the regional manufacturing hub for its Kia brand of vehicles in ASEAN countries and other potential markets.

Maintain MP with unchanged TP of RM1.50 based on 13x CY22E EPS (at 5-year Fwd. historical mean PER).

Risks to our call include: lower car sales volume, and forex falling outside the range of our expectations.

Source: Kenanga Research - 2 Apr 2021