INVESTMENT THESIS

• 2QFY19 within our expectation but ahead of consensus, 3.75sen dividends declared

• Quarterly earnings hits record high

• Massive backlog orders and lower than expected SST compensation

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

Results within expectation. BAuto reported 2QFY19 earnings of RM74m, which brought 1HFY19 earnings to RM124m. This is within our expectations but ahead of consensus accounting for 55% of our FY19F and 60% of consensus. An interim dividend of 3.75sen/share was declared, 134%yoy higher and represents a 58% payout ratio.

Quarterly earnings hits a record. Earnings more than tripled yearon-year on the back of strong volumes (+79%yoy) which was driven by the June-August tax holiday period. Additionally, the strong earnings were supported by a strong Ringgit in the period. In-line with the strong Mazda TIV, earnings from associates (comprising 30%-owned Mazda Malaysia (MMSB) and 29%-owned Inokom) rose to RM18m from below RM1m in the 2Q18. Associate earnings more than tripled on sequential basis.

Solid booking bank. Given strong booking bank of >8K units, with over 6K comprising the CX5, TIV for the rest of the year could remain pretty strong. This is against pre-tax holiday monthly TIV of just 1K-1.3K and a normal production rate of just 1.5K/month. Even post-SST in Sept, there were still around 130 unit of additional bookings for the CX5.

Localisation now factored into SST calculation. Car prices were originally expected to increase 1%-3% post-SST, which is basically a reversal of the impact from transition to GST back in 2015. However, there was 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 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 now lower, and given that the cost saving initiatives are still intact, margins next quarter may possibly be little affected, 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 - 13 Dec 2018