INVESTMENT THESIS

• 1QFY18 earnings within expectations

• Operating earnings up 17%qoq given stronger Ringgit, associates impacted by run-out of old CX5

• Weakest quarter before gap-up in a backloaded FY18F

• Re-affirm BUY at unchanged TP of RM2.55

Weakest quarter in a backloaded FY18F. BAuto reported net profit of RM20m for its 1QFY18 (FYE April). While this accounts for 10%/11% of our/consensus FY18F, it is in-line with expectations as FY18F earnings is backloaded given launch of the new CX5 towards end 2QFY18. Any weakness in share price today is an opportunity to buy cheap after having seen share price rise ~15% in the past 3 trading days.

Operating earnings rose by 2-digits. Revenue and operating profit actually expanded by 11%qoq and 17%qoq respectively (Malaysia operations EBIT up 38%qoq given stronger Ringgit since Apr17, partly offset by 15%qoq decline in Phiippines due to weak Peso). The lower net profit was solely due to minimal earnings from associates as 30% owned Mazda Malaysia Sdn Bhd (MMSB) and 29% owned Inokom were impacted by lower volumes due to run-out of the old CX5 (i.e. produced less of the old CX5 while preparing for transition to new CX5 lines).

Earnings gap-up over the next few quarters will be 4-pronged: 1) Mazda TIV pick up from new CX5 in 2QFY18 2) Absence of old CX5 runout discounts and price hike for new CX5 to boost margins mainly from 3QFY18 onwards 3) Export commencement of new CX5 to ASEAN exVietnam from 2QFY18 4) Resumption in production given new CX5 launch in 2QFY18 to boost associate earnings from MMSB and Inokom.

New CX5 alone to make up 40% FY18F Mazda TIV. Based on our check with management, CX5 target volume for FY18F is 5K units which reflects 7 months contribution from Oct1-Apr18 (this alone will account for 40% of our FY18F Mazda TIV of ~13K), which is why we have been highlighting that FY18F earnings will be backloaded. Mass production expected 28th Sep and official launch 5th Oct. The new CX5 is already in production now and these few hundred units will be delivered by month end (prior to actual launch).

Exports also kicking in 2H18. Export volume target is 11K-12K for FY18F, also reflecting 7 months contribution from Oct17 till Apr18; this is slightly higher than our assumption of 10,840 units (FY18F). In the past year, including 1QFY18, there were negligible exports in anticipation of new CX5; we assumed zero exports for the first 5 months of FY18F and the ~11K export volume to kick in only from Oct17.

Forex already falling into place. Other than volume variables, forex is falling into place already; YTD average JPY stands at RM3.89:JPYx100, already exceeding our FY18F assumption of RM3.90.

From a valuation standpoint, BAuto is cheap at just 11x CY18F earnings, relative to historical sector PE of ~12x. Given a strong 41% earnings CAGR over the next 2 years, solid dividend yields and value unlocking from the listing of BAP, BAuto should in fact trade at a premium to the sector. Reaffirm BUY at unchanged TP of RM2.55/share. Key share price catalysts in the next 12 months:

(1) A 30%yoy growth in FY18F Mazda TIV coupled with margin expansion driven by the new CX5 from Sep17

(2) Strength of the Ringgit against the JPY

(3) A more than doubling in associate earnings contribution to group (via 30%-owned Mazda Malaysia SB and 29%-owned Inokom) given a massive export market expansion which will triple MMSB’s prospective market.

(4) Attractive dividend yield of 6.3% underpinned by net cash which accounts for 12% of market cap and solid 7% FCFE yield (FY17F). Listing of Philippines unit will bump yields up further given potential one-off special dividends.

(5) Value unlocking from the listing of BAuto Philippines (BAP). Current market cap attributes practically no value to BAuto’s stake in BAP relative to the 16x indicative IPO valuation and historical sector valuation of 12x (for Malaysian autos). Ex-cash, BAuto trades at just 9x CY18F earnings.

Source: MIDF Research - 12 Sept 2017