We expect sales volume to normalize in the upcoming quarters, especially with the incoming all-new Mazda CX- 8 (CKD). BUY with a TP of RM2.85 based on 13x CY19E EPS. We like BAUTO for its: (i) solid earnings recovery buoyed by the all-new Mazda CX-5, (ii) superior margins, above industry peers (average profit margin of c.8% vs. peers at c.2%), and (iii) steady dividend yield at 7%.

We expect 4Q19 PATAMI to come in between RM45-50m, weaker compared to RM81.0m in 3Q19 (-38-44% QoQ) due to weaker local Mazda sales at 3,008 units (-39% QoQ, -8% YoY), after fulfilling backorders from the zero-rated tax discount period, particularly for its all new CX-5, in the previous quarter, as well as expected lower associates’ contribution from the lower production volume of the all-new CX-5. N

ote that, c.65% of the 3Q19 unit sales was contributed by the all-new Mazda CX-5. The group’s FY19 local Mazda sales is 16,085 units (+43% YoY). Nevertheless, we expect its sales volume to normalize (absence of one-off major event, such as zero-rated tax holiday) in the upcoming quarters, especially with the introduction of all-new Mazda CX-8 (CKD) for the Malaysian and Philippines markets.

BAUTO’s Philippines market will continue to be impacted by the Tax Reform for Acceleration and Inclusion (TRAIN) law, effective since January 2018. The TRAIN law has caused an increase in excise tax (up to 7%) and consequently, higher car prices, thus affecting the demand for motor vehicles in the Philippines. Nevertheless, BAUTO plans to preserve its sales volume by increasing its dealerships there to 21 from the current 18 dealerships by the end of FY19. Note that, 60.4%- owned BAUTO Philippines recorded recovery in sales volume in 3Q19 at 1,018 units (+46%), but we expect flattish growth for 4Q19. Total sales unit for 9M19 was 2,517 units (-40%).

For CY19, BAUTO will introduce the all-new Mazda 3 SkyActivX (CBU) end-2QCY19, all-new Mazda CX-8 (CKD) and all-new Mazda CX-30 (CBU) in 2HCY19.

Source: Rakuten Research - 11 Jun 2019