• Stay BUY, higher MYR2.90 TP from MYR2.55, 42% upside and 7.3% yield. Bermaz Auto launched the Sorento and Landtrek yesterday as part of continuing Kia and Peugeot’s growth. We see the recent sell-down as an opportunity to accumulate, as we expect robust earnings growth even beyond the delivery of Sales & Service Tax-exempt orders.

• The Kia Sorento and Peugeot Landtrek add to BAUTO’s currently limited number of models for both marques. The former will be CKD and cost an estimated MYR220-255k. The latter will be CBU and cost c.MYR123k. The addition of these two variants are part of BAUTO’s wider strategy to continue growing both brands in Malaysia with more models on the way.

• More CKDs to drive Mazda’s growth. With preparation for local assembly of the Mazda CX-30 already underway, we believe sales of the first units of the CKD CX-30 could be recognised in Feb/Mar 2023. With prices estimated at MYR10k lower for the CKD CX-30 vs the CBU variant and greater certainty in production volumes, this local assembly should help drive volume growth. With the successful CKD operations of the CX-5 and CX-8 so far, we do not discount the possibility of more Mazda CKDs ahead.

• Growing EV options, but demand remains lukewarm. In 1QCY23, BAUTO will add the Peugeot e-2008 into its existing EV line-up, which currently comprises Mazda and Kia’s MX-30 and EV6. While we think the brands’ EV offerings exemplify their electrification ambitions, consumers here are still only slowly warming up to EVs. There is no waiting time for the MX-30 currently and a short waiting period for certain colours of the EV6. We believe the lukewarm response is likely due to: i) EVs’ high prices, ii) lack of charging infrastructure, and iii) long charging times. We forecast BAUTO’s EV sales contributions to likely remain at <5% for the foreseeable future from the YTD of 0.6% of total unit sales.

• Minimal JPY/MYR impact. The JPY/MYR’s recent rise has prompted some concerns, as BAUTO has gains/losses from a weakening/strengthening of the JPY/MYR via 30% associate Mazda Malaysia, which incurs some costs in JPY. BAUTO also incurs JPY costs from importing Mazda CBUs – 18% in 1HFY23 (Apr). We believe this is set to decline with growing CKD contributions. We estimate that a 5% strengthening of the JPY/MYR will cut earnings by MYR0.8m, ie <0.4% of FY23F and FY24F earnings.

• We lift FY24F-FY25F earnings by 14-13% as we raise sales volume assumptions – with Mazda’s being boosted by higher CKD contributions while Kia’s is driven by its new models, especially the upcoming Sportage.

• Still BUY with a higher MYR2.90 TP based on an elevated FY24F earnings using an unchanged 13x P/E. Our TP includes a 4% ESG premium. We continue to like BAUTO for its 7.3% FY24F yield, and growth of its Peugeot and Kia brands. Key downside risks include a strengthening JPY/MYR rate, poorer-than-expected car sales, and worse-than-expected component shortages.

Source: RHB Research - 13 Jan 2023