MBMR is optimistic on more record years for Perodua vehicle sales in 2024 and 2025, with higher margins backed by the high-margin all-new Perodua D66b and a new Perodua EV model. Rising acceptance by local buyers of China-brand vehicles augurs well for its dealership of Jaecoo brand vehicles. We raise our FY24-25F net profit forecasts by 5% to 7%, respectively, lift our TP by 9% to RM6.30 (from RM5.80) and reiterate our OUTPERFORM call.Key takeaways from our recent engagement with the company are as follows:

1. MBMR echoed Perodua’s guidance for 2024 vehicle sales of 330k units (matching that of 2023) and vehicle production of 334k units. It believes the 2024 sales target could even be exceeded based on strong demand for affordably-priced vehicles. MBMR also hinted a more exciting year in 2025 buoyed by the all-new Perodua D66b in early-2025, and Perodua EV model by end-2025. Locally-produced Perodua EV model is expected to be priced within the range of RM50k-RM100k and it hopes to sell 10k unit during the initial period of National EV project by Perodua. Plants of Perodua Manufacturing (PMSB) and Perodua Global Manufacturing (PGMSB) have a combined capacity of 320,000 units. Currently operating in two shifts, there are plans to boost production by lifting productivity and increasing overtime. We are keeping our Perodua vehicle yearly sales assumption of 340k units in both FY24 and FY25.

2. MBMR has recently entered into a dealership agreement with Jaecoo, a fast-growing China car brand focusing on premium SUVs. It expects to open its first 1S outlet in Jun 2024 at Menara MBMR, Kuala Lumpur (capex below RM1m), followed by a 4S outlet in Segambut, KL in 2025 (capex around RM10m). MBMR will distribute Jaecoo J7 (opened for booking), J6 EV (from 2024 or 2025), Jaecoo J5 hybrid and EV models (2025), Jaecoo J9 in EV and PHEV forms (from 2025 or 2026). It hopes to sell 10k unit during the first year (comparable to sister brand Chery’s record). We understand that Jaecoo brand vehicles fetch higher distribution margins vs. Volvo and Volkswagen brands.

Forecasts. We raise our FY24-25F net profit forecasts by 5-7%, respectively, to account for a higher blended margin driven by the launch of the high-margin all-new Perodua D66b in early-2025 and a Perodua EV model launch by end-2025, as well as stronger production at its manufacturing unit underpinned by Perodua D66b and maiden contribution from the Jaecoo brand in 2HFY24.

Valuations. Correspondingly, we raise our TP by 9% to RM6.30 from RM5.80, as we also roll forward our valuation base year to FY25F (from FY24F), based on unchanged PER of 8x which is at a discount to the auto sector’s average forward PER of 11x given its smaller scale, and business model which is skewed toward auto dealerships compared to other players which are more into auto manufacturing. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 10).

Investment case. We continue to like MBMR for: (i) its strong earnings visibility backed by an order backlog of Perodua vehicles of over 100k units (almost half of its CY24 target sales of 340k units), (ii) being a good proxy to the mass-market Perodua brand given that it is the largest dealer of Perodua vehicles in Malaysia, as well as its 23% stake in Perusahaan Otomobil Kedua Sdn Bhd, the producer of Perodua vehicles, and (iii) its attractive dividend yield of about 7%. Maintain OUTPERFORM.

Risks to our call include: (i) consumers cutting back on discretionary spending (particularly big-ticket items like new cars) amidst high inflation and subsidy rationalisation, (ii) persistent disruptions (including chip shortages) in the global automotive supply chain, and (iii) persistent high cost for materials in auto parts manufacturing.

Source: Kenanga Research - 14 Jun 2024