Berjaya  Auto  remains  our  Top  Pick  in  the  sector.  We  expect a  robust 1QFY15 financial performance with core earnings of between MYR50m-55m that  could  outstrip consensus expectations.  We expect the strong earnings  to  spur the re-rating of the stock higher. Mazda’s strong new model  pipeline  could  help  to  drive  earnings  higher.  We  reiterate  our BUY call and raise our FV to MYR3.60 (from MYR3.20).

Another strong quarter beckons. Berjaya Auto announces its 1QFY15 earnings  this  evening.  We  expect  earnings  to  outstrip  the  preceding 4QFY14 on stronger sales volumes in the quarter that grew 26% q-o-q. Itwas also well supplied by completely built unit (CBU)  CX-5 2.5L variants that could help to lift operating margins and offset the higher allocation of Inokom assembled  CX-5s  to the Thai market. Demand for non-national vehicles continues to be robust with the upper-middle income segment largely unfazed by the recent increases in the costs of living ,  including fuel  price  hikes  and  higher  electricity  tariffs.  The  Philippines  also  saw robust auto sales with Mazda vehicle sales up 24.9% q-o-q in 1QFY15.

Strong  growth  prospects.  We believe the growth story for the Mazda marque  remains  intact.  The  marque’s  growth  may  outstrip  the  broader market as it takes market share from its rivals, helped by attractive welldesigned products. Demand remains robust and despite the competitive market, our channel checks suggest that the CX-5  still has a waiting list of  up  to  four  months.  Completely  knocked  down  (CKD)  production volume  at  its  new  line  within  the  Inokom  facility  is  gradually  ramping higher after its commissioning in April. The new model pipeline is strong with the locally assembled Mazda 3 and all new B-segment Mazda 2 due to be launched in early 2015, which should help to drive volume growth.

Forecasts and risks.  We lift our FY15-16 earnings forecasts by 13.2% and 14.8% to MYR213.3m and MYR246.6m respectively, after updating our  assumptions.  Risks  to  our  recommendation  include  weaker consumer  discretionary  spending,  unfavourable  forex  fluctuations,  a tighter financing environment and irrational price competition.

Berjaya Auto,  our top sector pick.  Our FV is raised to MYR3.60 (from MYR3.20),  derived  from  ascribing  an  unchanged  12.5x  target  P/E  to annualised  CY15  earnings,  which  is  largely  in  line  with  the  target  P/E used  to  value  industry  peers.  While  it  is  smaller  in  terms  of  market capitalisation  and  market  share,  we  believe  it  has  stronger  growth potential in the coming years. BUY.

Another Zoom-Zoom Quarter In Store

Domestic auto industry – Non-national marques continue to gain market share. For the YTD, the auto market has been  characterised  by fierce competition, margin pressure  and  robust  new  model  pipeline.  Buyers  have  become  increasingly  cost conscious  and  are  taking  the  time  to  compare  prices  from  across  different dealerships to get the best deals. The interest rate hike, more selective bank lending policies and higher cost of living have also put pressure on the lower-middle income category of car buyers–  ie  the  main target market of the national car manufacturers. Despite  total industry volume (TIV)  growing 3.0% y-o-y for the seven months to July, national car sales  contracted  4.9% y-o-y while non-national passenger vehicle sales stormed ahead, up 16.5% y-o-y. We believe this is a function of the  increasing choice in  terms  of  new  models  in  the  non-national  A-  and  B-segments,  as  well  as  fierce competition  in  the  non-national  B-segment  market  between  Toyota,  Honda  and Nissan,  which  has  also reduced the price premiums between the national and nonnational alternatives.

Philippines’  auto  market  breaking  new  records.  The  Philippines’  auto  marketcontinues to grow from strength to strength. After TIV growth of 16% y-o-y in 2013, YTD July sales are up another 26.0%,  according to data from the Asean  Automotive Federation. The Mazda marque continues to make headway in this market an d is on track to meet our FY15 sales target of 3,500 units.

Mazda’s  growth story  is intact.  The Mazda marque continues to make headway  in Malaysia, gaining market share from its rivals. Key selling points continue to be its fresh  styling and design, which make  Mazda cars highly distinctive. Its smaller base in the market, compared with  the Big Three (Toyota, Honda and Nissan),  also lends some exclusivity. The Mazda range is also quite comprehensive  and apart from its main models, the CX-5 SUV, Mazda 3,  Mazda 6 and BT-50 truck, it also offers multipurpose vehicle (MPV)  models in three flavours (Mazda 5,  Mazda 8  and  Biante), a large  SUV  (CX-9),  niche  sports  cars  (MX-5)  and  B-segment  Mazda  2  (launching soon). During 1QFY15, Mazda sales in Malaysia grew 26.0% q-o-q to 3,332 units with its market share expanding to 1.9% from 1.5% in the preceding three months.  Demand remains quite robust and despite the competitive market, our channel checks suggest that the  CX-5  still has a waiting list of up to four months.  CKD production volume at its  new  line  within  the  Inokom  facility  is  gradually  ramping  higher  following  its commissioning in  April  as labour and quality issues are ironed  out. In addition, we understand  that  the  additional  output  of  CKD  CX-5s  are  being  allocated  to  the Thailand market to support the dealership network there as the Thai auto market is experiencing a severe contraction in sales (YTD July:  -39.2% y-o-y). To compensate Berjaya Auto, Mazda Japan has agreed to allocate more CBU CX-5 2.5L to Malaysia, which should help to bolster margins and expand model variants, offering consumers added choice.

New models to drive growth into 2015 and beyond.  A strong pipeline  of new and relevant  models  will  likely  be  critical  for  Mazda  to  continue  growing  into  2015  and beyond.  We expect the CKD  Mazda 3  to  be launched in early 2015,  that will  likelyhelp to bring selling prices to MYR120,000 or below (CBU Mazda 3: MYR139,000  on the  road  (OTR))  that  may  significantly  increase  the  addressable  market  for  the vehicle,  as  the  higher  rate  of  localisation  should  yield  lower  effective  excise  duty rates, thus  enabling Mazda to price its products more competitively.  The Mazda 3  is currently  imported  from  Japan  and  priced  at  the  top  end  of  the  C-segment  pricing spectrum,  nearly  in  the  D-segment  price  category  due  to  the  unfavourable  tax structure for CBU vehicles. 

The  all  new  Mazda  2  is  eagerly  anticipated  as  it  will  likely  provide  a  product  for Mazda to compete in the B-segment. The  Mazda 2’s design is faithful to the Hazumi concept  car  and  has  received  positive  press  reviews.  The  model  will  likely  be assembled  in  Thailand  and  management  hopes  to  be  able  to  price  it  at  below MYR90,000. We estimate the size of this market segment to be at least 90,000 units per year. While the volume potential is clearly dependent on the final selling price, we are only forecasting sales of 5,000 units of the Mazda 2 in FY16. We  expect  a  CX-3  micro-SUV,  described  as  a  sub-compact  crossover  positioned below the larger  CX-5  and based on the  Mazda 2  platform to be introduced towardsend-2015.  We  believe  this  is  timely,  as  small,  city  friendly,  high  riding  SUVs  is  a growing niche that has few mainstream competitors. Next year’s CX-3 could come up against peers such as the Peugeot 2008, Ford Ecosport and forthcoming Honda HRV. We have yet to factor in any CX-3 sales into our FY16 forecasts.

Investment risks.  These include  weaker consumer discretionary spending patterns, unfavourable  forex  fluctuations,  a  tighter  financing  environment  and  irrational  price competition in the market place leading to severe margin erosion.Forecasts. After updating our volume and margin assumptions, we lift our FY15 -16 earnings  forecasts  by  13.2%  and  14.8%  to  MYR213.3m  and  MYR246.6m respectively.  While the introduction of the smaller and cheaper Mazda 2  could affect its  nominal  average  margin  per  car,  we  believe  this  will   likely  be  offset  by  the increase in volumes and business scale that should  help to lift operating leverage. We believe our FY16 volume forecast remains conservative, factoring in sales of only 5,000 units of the  Mazda 2. Volume estimates could rise further if  CX-3  sales were included. Our FY15-16 volume forecasts of 13,950 and 19,950 units for Malaysia is now 6.3% and 30.0% higher than in our previous estimate.

Investment  case.  Our  FV  is  raised  to  MYR3.60  (from  MYR3.20),  derived  from ascribing an unchanged 12.5x target P/E to annualised CY15 earnings that is largely in  line  with  the  target  P/E  used  to  value  industry  peers.  Although  Berjaya  Auto  is smaller in terms of market  capitalisation and market share, we believe it has stronger growth potential in the coming years,  driven by the strong demand for its attractive product range, a strong pipeline of relevant new models that  could  see the Mazda marque continue to gain market share from its peers. Berjaya Auto is our Top Pick in the auto sector.

Source: RHB