INVESTMENT THESIS

• 1QFY19 within expectation, 2.5sen dividends declared

• Earnings would have been stronger if not for MMSB supply disruption

• Massive backlog orders and lower than expected SST compensation – expect new record earnings in 2QFY19

• Re-affirm BUY at unchanged TP of RM2.70, 7.5% yields attractive

Results within expectation. BAuto reported 1QFY19 earnings of RM50m. This is within expectations accounting for 22% of our FY19F and 24% of consensus. An interim dividend of 2.5sen was declared, 67%yoy higher and represents a 58% payout ratio.

Revenues delayed due to production calibration. Earnings increased 149%yoy but on sequential basis (against a record 4QFY18) saw a 12%qoq drop in line with a drop in revenue. However, the massive tax-holiday driven volumes are only delayed, given supply constraint form MMSB - in June, MMSB’s production was disrupted as it recalibrated production rate higher to accommodate for temporarily higher volumes. Production rate has now increased to 2.2K/month (only up till Nov18) from 1.5K/month previously.

Solid booking bank. As highlighted above, BAuto has a booking bank of >8K units, with over 6K comprising the CX5. This is against pre-taxholiday monthly TIV of just 1K-1.3K and a normal production rate of just 1.5K/month. We expect revenues to recover strongly next quarter. Even post-SST in Sept, there were still around 130 unit bookings for the CX5.

Localisation now factored into SST calculation. We (and consensus) originally expected car prices to increase 1%-3% post-SST, which is basically a reversal of the impact from transition to GST back in 2015. However, there is a change in the way the SST 2.0 is calculated - SST calculation now exempts localised components, essentially reducing the amount chargeable by the 10% SST – this is similar to the excise duty mechanism which rewards localisation. Unlike CKDs, CBU prices are still raised by 1%-3% post-SST 2.0 as the full amount of docket price, import duty and excise duty are chargeable by a 10% SST.

Impact of SST compensation toned down. Given the lower than earlier anticipated SST cost, implications from subsidising SST for bookings pre-Sept 1st are also toned down. BAuto has around 8K preSept bookings to compensate, of which ~6K comprise of the CX5 (CKD). Given the new mechanism, SST cost (for the CX5) is estimated to reduce from RM5.7K/car (under GST) to RM3.8K/car (under SST 2.0), or a reduction of 2.8% against the CX5’s average price. Cost to compensate for SST (for the CX5) is expected to reduce from an earlier estimated RM34m to just RM22m. Earlier plan was to claw back margins by lowering dealer incentives as well as lower A&P and marketing expenses. However, since the cost for SST compensation is lower now, and given the cost saving initiatives are still intact, margins next quarter may even remain intact, we think.

Recommendation. Re-affirm BUY at unchanged TP of RM2.70. From a valuation standpoint, BAuto is cheap at just 12x CY19F earnings (against a 61%yoy FY19F earnings growth), while dividend yield of 7% is attractive. BAuto is an entrepreneur driven, highly cash generative asset-light business while the capex-intensive manufacturing unit is parked under 30%-owned MMSB and is kept off-balance sheet. MMSB itself is already self-funding. Manufacturing capex has peaked having built up production capacity to 34K units/annum (on 2-shift) – FY19F-20F is mostly about monetising this incremental capacity via new models i.e. CX5 and CX8 and export expansion to South East Asia exVietnam. Key share price catalysts in the next 12 months:

(1) An 17%-30%yoy Mazda TIV growth (FY19F) coupled with margin expansion driven by full year impact of new CX5

(2) A more than doubling in associate earnings contribution to group (via 30%-owned Mazda Malaysia SB and 29%-owned Inokom) given export market expansion to South East Asia (ex-Vietnam) and re-acceleration in production for the domestic market.

(3) Launch of locally assembled CX8 2QFY20F, which fills a gap in Mazda’s model mix

(4) Attractive dividend yield of 7% - net cash accounts for 10% of market cap coupled with solid 9% FCFE yield (FY19F). Our payout assumption is capped at 80% vs. historical 80%-113% payout.

Source: MIDF Research - 14 Sept 2018