• Reiterate BUY, with new MYR2.35 TP from MYR2.30, 33% upside. Last Thursday, we attended Bermaz Auto’s launch of the CKD 7-seater and 8- seater Kia Carnival, one of its many new Kia vehicles in the line-up. We lifted BAUTO’s ESG score for its social and environmental considerations in investment decision-making. We continue to like BAUTO for its attractive dividend yield of c.6%, continued growth in the Kia and Peugeot brands, and undemanding valuation of 10x FY23 P/E.

• Launch of the CKD Kia Carnival. Starting at MYR231k, the Kia Carnival is a cheaper alternative to the Toyota Vellfire/Alphard. Management is “pleasantly surprised” by the demand for the 7 and 8-seater CKD variants, based on the substantial pre-bookings.

• Production. For now, 33%-owned Kia Malaysia will still be importing the 11-seater CBU Kia Carnival due to local production constraints and supply chain issues. However, Kia Malaysia plans to produce up to 5,000 units of the Kia Carnival pa, for both domestic consumption and exports to ASEAN markets. Once production capacity can meet demand, it will stop importing CBUs. At least 40% of the cost content will be domestic to comply with requirements.

• BAUTO’s Kia strategy moving forward. Having been appointed by Kia Corporation (its principal), BAUTO has been looking to refresh the brand and improve its after-sales services. Kia Malaysia has indicated that it does not see Kia as a mainstream product, which we think helps avoid the stiff competition with the national marques. We think Kia’s exciting new car line- up will appeal to the customer segment sitting between the national marques and the Japanese brands.

• Backlog orders. We gather that while backlog orders across Mazda, Kia, and Peugeot have been strong since end June, orders have meaningfully slowed down in July, as expected. We estimate that the total current backlog order across all three brands stand at c.12k.

• ESG considerations. With social responsibility in mind, BAUTO is using the underutilised capacity at the Inokom plant to manufacture the CKD Kia Carnival to: i) Create employment in and around Inokom via downstream activities and ii) minimise additional investments, with incremental capex for the CKD operations at c.MYR30m. BAUTO is also amongst players with the most EVs lined up, accelerating Malaysia’s EV adoption. We lift our ESG score to 3.2 from 3.1 for its continuous ESG efforts.

• BUY. We maintain our estimates, but raise our ESG premium to 4% from 2%, and lift our TP to MYR2.35 accordingly. Our TP is based on 13x FY23F P/E. Currently, the stock is trading at 10x FY23F EPS – below -1SD from its 5-year historical average P/E, which we think undervalues the stock. Key downside risks include a strengthening JPY/MYR, poorer-than-expected car sales, and worse-than-expected component shortages.

Source: RHB Research - 1 Aug 2022