We  brought  Berjaya  Auto’s  senior  management  on  their  maiden corporate  roadshow  to  Hong  Kong  recently.  We  received  a  warm reception,  with nine meetings held over 1½ days.  The company  has a compelling growth story  and  we  forecast  its  3-year earnings CAGR  at 54.4%.  Berjaya Auto is our top sector pick,  trading  at an undemanding FY15 P/E of 9.4x. Reiterate BUY, with a MYR2.55 FV.

• Warm  reception.  We  recently  concluded  a  highly  successful  maiden corporate  roadshow with  Berjaya Auto in  Hong Kong,  during  which  we had nine separate investor meetings over 1½ days. We were pleasantly surprised  to  find  strong  investor  appetite  for  stocks  with  a  compelling growth angle, as we  fielded  detailed questions on the company’s growth strategy.  The  high  degree  of  preparation  for  the  meetings  suggests genuine investor interest in the stock.
• Compelling growth story.  We believe Berjaya Auto has a compelling growth  story  going  forward.  Mazda  sales  in  Malaysia  are  set  to  enjoy exponential  growth  (2013:  +45.2%  y-o-y)  over  the  next  several  years,backed by a strong new product pipeline and the local assembly of more models. Mazda already has a comprehensive range of products  supplied via  local assembly  and imports. Mazda Japan is currently undergoing a renaissance,  having recently introduced  a slew of highly successful new products  centred  on  the  new  KODO  design  language  and  SkyActiv technologies  that have received worldwide acclaim. Five  all-new models are  set  to  be  introduced  between  now  and  2016.  Its  new  assembly facility within the Inokom plant  will be commissioned in April. The higher rate  of  localisation  will  yield  lower  effective  excise  duty  rates,  thus enabling Mazda to price its products more competitively
• Investment case. We reiterate our BUY call and lift our FV  to MYR2.55 (from MYR2.20). Our  FV is derived from rolling forward our base year to CY15 (from FY15) and applying a target P/E of 11.5x (from12.5x), which is in line with peer target valuations  of  9-13x. Berjaya Auto  is currently trading  at  an  undemanding  FY15  P/E  of  9.4x  relative  to  its  3-year earnings CAGR of 54.4%.

Zoom-Zoom In Hong Kong
Warm reception. During our recent maiden corporate roadshow with Berjaya Auto in Hong  Kong,  we  held  nine  separate  investor  meetings  over  1½  days.  We  were pleasantly  surprised  by  the  strong  investor  appetite  for  stocks  with  a  compelling growth angle,  as we fielded  detailed questions on the company’s growth strategy,  as well  as  queries  on  the  implications  of  the  recently-announced  National  Automotive Policy  (NAP).  The  high  degree  of  preparation  for  the  meetings  suggests  genuine investor interest in the stock.

Compelling  growth story.  We believe Berjaya Auto has a compelling growth story going forward. Mazda sales in Malaysia  are  set to enjoy exponential growth (2013: +45.2% y-o-y) over the next several years,  backed by a strong new product pipeline and the local assembly of more models.

Strong  product  pipeline.  Mazda’s  comprehensive  range  of  products  is  supplied from local assembly (CX-5 SUVs) and imports, eg Thailand (BT-50 trucks) and Japan (Mazda  3,  6,  and  others).  Mazda  Japan  is  currently  undergoing  a  renaissance, having recently introduced  a slew of highly successful new products  centred  on the acclaim. Five all-new models are set to be introduced between now and 2016, one of them  being  the new  Mazda 2  supermini based on the  Hazumi  concept car that was recently  unveiled  at  the  Geneva  Motor  Show.  In  our  opinion,  Mazda  has  a  strong design edge over other Japanese  (and Korean)  marques and a  unique selling point that appeals to discerning buyers.

Increased localisation.  Its new assembly facility within the Inokom plant, which  will be  commissioned  in  April,  will  ramp  up  production  of  its  CX-5  SUV  (two-thirds  of which are exported to Thailand) and is set to introduce locally-assembled variants of the Mazda  3 (a finalist of 2014 World Car of the Year) by October,  and the Mazda 6 in  2015.  The  higher  rate  of  localisation  will  yield  lower  effective  excise  duty  rates ,thus  enabling  Mazda  to  price  its  products  more  competitively,  which  may  in  turn boost sales volume.

Mazda to enjoy market share gains.  With sales coming off a low base and helped by a pipeline of attractive new products, we forecast Mazda sales in Malaysia to grow at  a  FY13-16F  CAGR  of  26.7%.  Mazda’s  2013  new  vehicle  registrations  of  9,197 units  were  merely  a  tenth  of  Toyota  sales  and  a  fifth  of  Honda  and  Nissan’s  in Malaysia respectively. Going forward, we believe  Mazda Malaysia’s expected robust sales growth will easily outstrip the broader domestic automotive market, leading to market  share  gains.  We  see  these  gains  coming  not  only  from  the  Big  Three Japanese  peers  (Toyota,  Honda  and  Nissan),  but  also  from  Korean  and  other continental marques.

Mazda sales on an  uptrend in the Philippines.  Berjaya Auto Philippines  (BAP),  a 60%-owned subsidiary of Berjaya Auto,  is the sole distributor and importer of Mazda vehicles. The Philippines’ automotive market  saw steady growth from 2006-2012 with a CAGR  of 7.9%,  mainly driven by  demand for commercial vehicles.  Coming off  a small  base  of  just  657  units  of  vehicles  sold  in  FY13,  we  forecast  Mazda  sales  to grow at an 89% CAGR during FY13-16F.

Experienced  management  team.  Investor  questions  also  focused  on  the  track record of Berjaya Auto’s management team, especially  its  CEO Dato’ Sri Ben Yeoh,who  has  over  40  years  of  experience  in  the  automotive  industry,  holding  various positions from technical manager to executive director. Dato’ Sri Yeoh led a team that successfully turned Hyundai  into a major player in the domestic automotive market, having  managed  the South Korean marque’s  distribution and retailing  operations in Malaysia between 1997 and 2007.

Investment  risks.  These  include:  i)  a  weaker  economic  environment,  ii) unfavourable  forex  fluctuations,  iii)  supply  chain  disruption,  iv)  unpredictable consumer  behaviour,  and  v)  rising  competition  within  the  industry  that  could  crimp margins.

Forecasts.  We revise our  FY14-16 recurring net profit estimates by  15.6%, 10.1% and 10.0% respectively,  after reviewing our sales volume assumptions and tweaking our margin assumptions slightly.

Investment  case.  We  reiterate  our  BUY  call  and  lift  our  FV  to  MYR2.55  (from MYR2.20). Our FV is derived from rolling forward our base year to CY15 (from FY15) and applying a target P/E of 11.5x (from12.5x), which  is in line with  its  peer target valuations of 9-13x. Berjaya Auto is currently trading at an undemanding FY15 P/E of 9.4x relative to its 3-year earnings CAGR of 54.4%.

Financial Exhibits

SWOT Analysis

Company Profile
Berjaya  Auto  Berhad  is  involved  in  the  distribution,  assembling,  retailing  and  provision  of  after-sales  services  of  Mazda  vehicles  in Malaysia. The group is also involved in the domestic distribution as well as exports of locally-assembled Mazda vehicles.

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Source: RHB