We  initiate  coverage  on  Berjaya  Auto  (BAUTO),  the  sole  importer  and distributor  of  Mazda  vehicles  in  Malaysia  and  the  Philippines,  with  a BUY.  Mazda  cars  are  set  to  sell  well,  aided  by  their  attractive  KODO design  language,  highly-acclaimed  SkyActiv  technology  and  strong localisation programme  that will  help  BAUTO  yield  a 3-year EPS CAGR of 37.4%. Our FV of RM1.95 is based on 12x FY15F P/E.

• Catching up fast.  Although Mazda has not been a mainstream brand in Malaysia  and  the  Philippines  in  recent  years,  its  market  share  in  the former  has  grown  to  3.3%  YTD  from  a  mere  0.4%  in  2008.  BAUTO became the marque’s sole importer and distributor in Malaysia that year(it  became  the Philippines’ importer/distributor  in 2013).  Mazda  vehicles have  been  well  received,  particularly  for  their  attractive  and  innovative “KODO-Soul of Motion”  design  language  and highly acclaimed  SkyActiv technology. We think  that  Mazda has  a  strong design edge over  other Japanese  marques  and  is  a  unique  selling  point  that  appeals  to  more discerning buyers.
• Robust  performance.  BAUTO  recorded  strong  1HFY14  earnings growth  on  a  higher  9.4%  EBIT  margin  (1HFY13:  7.3%).  The  margin expansion was  due to:  i)  duties  reduction  on  higher localisation  content for the  CX-5  sports utility vehicle (SUV),  and ii) rebates for  the  6  saloon on a  change in docket price. Going forward, we  see  sustainable  higher margins  from  completely  knocked  down  (CKD)  models,  with  CKD programmes slated for the 3 and 6 models in the pipeline.
• Higher sales and margins to drive  37.4% EPS CAGR FY13-16F. We expect  BAUTO  to  achieve  104.9%/25%/13%  earnings  growth  in FY14F/15F/16F, driven  by: i) sales of the  bestselling  CX-5  and  3, ii)  the launch of five new models in the next three years ,  and iii)  its expanding CKD  programme.  Our  FY14/15/16  PATAMI  estimates  are MYR104.2m/MYR130.3m/MYR147.2m.
• BUY, with a MYR1.95 FV. Our FV is based on 12x FY15F P/E, which is broadly in line with peer  target  valuations,  with  the stock offering robust earnings growth. BAUTO currently trades at an undemanding FY15F P/E of 10.4x. Our FV also implies a 16% upside. BUY.

Company Profile
Background   
BAUTO  was listed on the Main Board of Bursa  Malaysia Securities on 18 Nov  2013. The  IPO  saw  the  group  raising  approximately  MYR57.9m  from  the  issuance  of 82.76m new shares – at an offer price of MYR0.70/share – with 72% of the proceeds slated for working capital use. Mazda’s appearance in Malaysia began  way back in Oct 1964 when Asia Motors, a local company set up by the Ph’ng  family,  first obtained the franchise.  Asia Motors ceased  operations  in  Malaysia  in  the  late  1980s  and  Cycle  &  Carriage  Bintang (CNCB  MK, NR) then held the franchise for a good 20 years. In 2008, Prima Merdu SB  was  appointed  by  Mazda  as  the  new  importer.  In  the  same  year,  it  began collaborating  with Bermaz  Motor SB, BAUTO’s wholly owned subsidiary, to distribute Mazda vehicles in Malaysia.

Key Management
BAUTO’s board is made up  five  directors  –  three of them  are  independent directors, while  Dato’  Yeoh  Choon  San  and  Dato’  Lee  Kok  Chuan  as  non-Independent directors. Besides Dato’ Lee,  who acts as the representative  for  Berjaya  Corp (BC MK,  NR)  on  the  board,  none  of  the  other  directors  represents  a  corporate shareholder.

Dato’ Yeoh Choon San 
Dato’ Yeoh has been  BAUTO’s  chief  executive officer  and  executive director  since 2011. He has over 40 years of experience in the automotive industry, holding various positions ranging  from  technical manager to executive  director. He led the team that successfully  turned  around  the  sales  performance  of  Hyundai  (005380  KS,  NR)’s range of passenger vehicles in Malaysia, and managed  the South Korean marque’s distribution and retailing operations here between 1997 and 2007.

Tan Say Chye 
Mr Tan Say Chye has been BAUTO’s general manager of corporate planning/internal audit since 2008 and has over 20 years of experience within the Berjaya  group. He started  his  career  in  1982  with  Chew  &  Associates  before  moving  to  KFC  Food Processing  SB  (now  known  as  Ayamas  Food  Corp  SB),  where  he  gained  wide exposure to  the poultry business by serving  in roles like  accounts executive,  internal audit  supervisor  and  management  accountant.  Tan  has  been  a  member  of  the Malaysian  Institute  of  Accountants  (MIA)  since  1995  and  has  been  a  fellow  of  the Association of Chartered Certified Accountants (ACCA), UK since 1998.

Tan Lay Hian
Mr Tan Lay Hian has been BAUTO’s general manager of finance since 2009 and has over  30  years  of  working  experience  in  audit  and  finance.  He  began  his  career  in 1983 as an audit trainee at  Peat Marwick & Mitchell Kuala Lumpur  (now known as KPMG  Malaysia). He left KPMG Malaysia in 1989 and has, since   then,  held various positions  in  the  audit  and  finance  field  in  various  industries.  Tan  is  a  qualified accountant and holds a professional degree from the Malaysian Institute of Certified Public Accountants.

Business Model

BAUTO  is  the  sole  distributor  and  importer  of  Mazda  vehicles  in  Malaysia .  It  is principally involved in the:
i.  Distribution and retailing of Mazda vehicles 
ii.  Provision of after sales services for Mazda vehicles
The group operates a nationwide sales network of four branches and 69 dealers. Its associate company, Mazda  Malaysia  SB  (MMSB)  undertakes the local assembly of Mazda vehicles  using locally manufactured  and imported Mazda  parts. The vehicle assembly  is done by third-party contract assembler Inokom  Corp SB  at  the latter’s plant in Kulim, Kedah.

Industry Outlook: Malaysia 
Flattish growth going forward 
The  YTD  total  industry  volume  (TIV)  has  exceeded  initial  expectations,  with  the industry  registering  a  growth of  5.7%  y-o-y.  The  industry’s  growth  in  1H  2013  was slow,  largely due to the uncertainties surrounding the 13 th  General Election  that was held  in  May  that  year.  Consumers  were  cautious  with  their  vehicle  purchases  in anticipation  of  lower  car  prices.  Auto  sales  have  subsequently  rebounded  and  we expect  2013’s  TIV  to  exceed  650,000  units.  Volume  growth  was  helped  by  the introduction  of  value-for-money  (VFM)  models  by  various  distributors.  In  2014,  we forecast a TIV of 675,000 units, or a 3.5% y-o-y growth.

Rising GNI to drive consumer spending
Gross  national  income  (GNI)  enjoyed  a  steady  8.8%  CAGR  growth  in  2000-2012. The GNI per capita is expected to be more than  MYR31,000 in  2013 vs MYR30,803 in  2012.  This  level  is  expected  to  grow  in  the  coming  years,  in  line  with  the Government’s goal to transform  Malaysia into a high-income nation by 2020  through the Economic Transformation Programme (ETP). The rising GNI   will be a key driver for  higher  vehicles  sales.  However,  there  are  risks  to  consumer  discretionary spending in 2014. These risks include:  i) the  high household debt  to  GDP  of 85.1%, ii)  rising  living  costs  from  the  rationalisation  of  government  subsidies,  iii)  higher inflationary  pressure  resulting  from  the  subsidies  rationalisation  exercise,  and  iv)  a higher  interest  rate  environment  going  forward.  Our  base  case  expectation  is  for consumer spending to remain resilient in 2014.

Source: RHB