BAUTO has been awarded the distributorship of Deepal EV vehicles in Malaysia. Deepal will take over the vacated Peugeot showroom in Glenmarie, Shah Alam. The first model to be introduce by 1QCY25 will be the Deepal S05 (compact SUV, RM100k to RM150k) and Deepal S07 (mid-size SUV, RM150k to RM200k), both expected to be competitively priced against BYD Dolphin and BYD Atto 3. The sales volumes will be insignificant during our forecast period. Hence, we maintain our forecasts, TP of RM2.45 and OUTPERFORM call.

Deepal EV distributorship. BAUTO has been awarded the distributorship, sale of spare parts and provision of after-sales services of Deepal brand electric vehicles (EVs) in Malaysia by Chongqing Changan Automobile Co. Ltd., China. Changan Automobile is one of the four major Chinese automobile groups in China, with 40 years of car manufacturing experience, and has 13 manufacturing bases and 34 vehicle and new powertrain plants worldwide.

Changan Automobile is currently constructing its first overseas production facility (costing about THB 8.8b) in Rayong, Thailand under Phase 1, with completion expected by early 2025 and will consist of painting, assembly, engine assembly, and battery assembly lines with a yearly production capacity of up to 100,000 vehicles For Phase 2, Changan Automobile plans to invest up to THB 20b for the establishment of a new energy vehicle production facility with a yearly production capacity of up to 200,000 vehicles, to cater for the ASEAN market region as well as for the right-hand drive global market.

Changan sold 250,832 vehicles (+4%) to mainland China customers as of October 2024 on which 85,272 units are new energy vehicles (NEV).

The sales were also boosted by the newly launched Deepal S05 SUV, selling over 10,000 units within the first 10 days of its release. The company has a number of self-owned brands, including Changan, Nevo, Deepal, and Avatr, as well as joint venture brands with Ford and Mazda. Aside from Malaysia, the Chinese carmaker also plans to sell right-hand-drive (RHD) vehicles to customers in Indonesia, Australia, New Zealand, South Africa, and the UK.

Impact on earnings. We estimate that the earnings impact of the latest development is negligible at <1%. The new distributorship requires minimum capex (probably less than RM2m), no volume commitment and will take over the showroom vacated by Peugeot in Glenmarie, Shah Alam. Its other brand, Xpeng is already occupying its other showroom next to Mazda Glenmarie. Given the crowded EV market with various new EV launches, we believe that at most it will only be able to sell at least 500 CBU units during the first year of operation. The models to be introduced (most likely by 1QCY25) will be the Deepal S05 (compact SUV, RM100k to RM150k) and Deepal S07 (mid-size SUV, RM150k to RM200k) are expected to be competitively priced against BYD Dolphin and BYD Atto 3.

Forecasts. Maintained as the sales volumes will be insignificant during our forecast period.

Valuations. We also maintain our TP at RM2.45 based on 10x CY25F PER, at a 1x multiple discounts to the sector's average forward PER of 11x to reflect higher earnings risk for mid-market auto players on subsidy rationalisation which will hurt their target customers, i.e. the middle-income group, the most. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us (see Page 4).

Investment case. We continue to like BAUTO for: (i) its strong near-term earnings visibility backed by an order backlog of 2k units for Mazda, and Kia vehicles, (ii) its premium mid-market Mazda brand that offers superior margins, and (iii) its attractive dividend yield of about 8%. The share price has declined 11% YTD, which we believe has been factored in with BAUTO now trading at 8.5x based on our FY25F EPS, which is cheap versus historical average of 11x and auto sector's average forward PER of 11x. Maintain OUTPERFORM.

Source: Kenanga Research - 26 Nov 2024