BJAUTO RHB Luncheon

7/22/2019 BJAUTO RHB Luncheon

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Company Update, 5 March 2014

Berjaya Auto(BAUTO MK) Buy (Maintained)Consumer Cyclical - Auto & Autoparts Target Price: MYR2.20

Market Cap: USD443m Price: MYR1.80

More Zoom-ZoomAwaits

Macro

Risks

Growth

Value

Source: Bloomberg

Avg Turnover (MYR/USD) 2.99m/0.92m

Cons. Upside (%) NA

Upside (%) 22.0

52-wk Price low/high (MYR) 0.70 - 1.93

Free float (%) 25

Shareholders (%)

Berjaya Group Berhad 67.6

Podium Success Sdn Bhd 7.1

Shariah compliant

Alexander Chia+603 9207 7621

[email protected]

Source: Company data, Error! Bookmark not defined.

We came out from our recent corporate luncheon with Berjaya Auto(BAUTO) feeling more positive on its prospects going forward. Webelieve BAUTOs growth rate in the next few years will easily outstripthat of its peers as well as the broader market, helped by its compellingproduct range and increased localisation. Maintain BUY, with a new TPof MYR2.20 (from MYR1.95), based on a FY15F 12.5x P/E.

Highlights from our recent corporate luncheon. RHBs recently-heldluncheon (preceded by a presentation) for Berjaya Auto (BAUTO) waswell attended by 14 fund managers. BAUTOs management, led by CEODato Sri Ben Yeoh and director Dato Francis Lee, provided insights intoits: i) sales volume YTD, ii) strategy for the coming years, iii) preview ofits new models to be launched, and iv) reaction to the recently-announced National Automotive Policy (NAP). The management alsorevealed that its new assembly facility within the Inokom plant is onschedule to be commissioned next month.

Five new models in three years.The first of five new models in thenext three years will be the all-new Mazda 2, which we expect to belaunched by 4Q14. We believe the other new models will also include C-

segment and D-segment models.

Lifting our forecasts. We lift our FY14-16 earnings forecasts by4.3%/8.7%/16% respectively, after factoring in: i) growth in sales volumefrom the expansion of its completely-knocked-down(CKD) operations, ii)five new models from now till 2016, and iii) an increase in productioncapacity as well as improved utilisation rates. We have also fined-tunedour margin assumptions in anticipation of increased CKD sales.

Upgrading TP to MYR2.20. We peg our stock to a new 12.5x P/E (from12x), broadly in line with peer target valuations and raise our target priceto MYR2.20 (from MYR1.95). In our opinion, the higher P/E is justifiedconsidering the 3-year FY13-16 EPS CAGR of 49.5%. The impliedtarget PE-G is only 0.25x. BAUTO currently trades at an undemanding

FY15 P/E of 10.3x. Maintain BUY.

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Berjaya Auto (BAUTO MK)Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

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Forecasts and Valuations Apr-12 Apr-13 Apr-14F Apr-15F Apr-16F

Total turnover (MYRm) 664 1,064 1,448 1,918 2,297

Reported net profit (MYRm) 41 52 109 142 171

Recurring net profit (MYRm) 41 52 109 142 171

Recurring net profit growth (%) 12.9 26.1 110.4 30.3 20.6

Recurring EPS (MYR) 0.06 0.07 0.13 0.18 0.21

DPS (MYR) 0.00 0.00 0.03 0.04 0.05

Recurring P/E (x) 31.7 25.1 13.4 10.2 8.5

P/B (x) 12.0 8.2 5.1 3.7 2.8

P/CF (x) 14.7 24.4 18.9 11.5 10.1

Dividend Yield (%) 0.0 0.0 1.9 2.4 2.9

EV/EBITDA (x) 20.5 14.3 8.2 5.9 4.6Return on average equity (%) 46.6 38.7 49.0 41.9 37.5

Net debt to equity (%) net cash net cash net cash net cash net cash

Our vs consensus EPS (%) 4.1 0.7 6.2


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Berjaya Auto(BAUTO MK)5 March 2014

See important disclosures at the end of this report 2

Mazdas YTD sales volume. For 9MFY14, BAUTO recorded sales volume of 6,717units in Malaysia and 1,591 units in the Philippines, which were in line with ourestimates. Its CX-5 model continues to be the key driver of local sales volume,followed by Mazda 6, which was launched last year. In the Philippines, 1HFY14 saleslargely comprised CX-5and Mazda 3. The Mazda 6has won Top Gear Philippines2013 Car of the Year, which has helped to raise the profile of Mazda cars there.

Figure 1: Malaysia - 9MFY14 vehicle sales by model Figure 2: Philippines - Mazdas 1HFY14 vehicle sales

Source: Company, Malaysian Automotive Association (MAA) Source: Company

New Mazda assembly facility to be commissioned by April. Management expectsthe new assembly facility located within the Inokom plant in Kulim to be fullycommissioned by April this year according to schedule. A visit to the new plant lastweek confirmed that trial production has already begun. Although utilisation rateshave yet to reach optimal levels due to labour constraints, we understand from themanagement that productivity has improved gradually and by end-2014, productionrates should reach the level to enable the production of 20,000 units per annum.

New Mazda 2 with SkyActivtechnology to stir the local B-segment. We gatherfrom the management that the first of the five new models to be introduced in thenext three years is the all new Mazda 2 that could reach Malaysian market by end-2014. We understand that the new Mazda 2will be built in Thailand and come in twovariants hatchback and sedan. Both will feature Mazdas award winning SkyActivtechnologies. While Mazda has not officially stated that the Hazumi is in fact the newMazda 2, it mentioned that the Hazumi conceptwould signpost the brands futuresubcompact cars from the design perspective. All in, we are confident that this sleeksubcompact car will be well-received and should enable Mazda to reclaim marketshare in the B-segment in addition to rounding off its product range.

Figure 3: Mazdas Hazumiconcept

Source: Mazda Japan

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EBIT margins to be sustainable going forward. BAUTO recorded strong 1HFY14earnings growth helped by a higher 9.4% EBIT margin (1HFY13: 7.3%). We reaffirmour view that the EBIT margins will be sustainable in the upcoming years afterfactoring in: i) improved CKD operations margins due to higher localisation, ii)improved labour productivity, iii) updating our JPY/MYR assumptions, and iv) higherproportion of CKD sales.

Figure 4: Upcoming local vehicle launches

Model

B-Segment

Proton GSC New model

Mazda 2 New Generation model

HondaCity New Generation model

Honda Jazz New Generation model

MINI F56 Hatch New Generation model

Ford Fiesta 1.0 EcoBoost New Fiestavariant

Ford Fiesta ST New Fiestavariant

C-Segment

Mazda 3 CKD model

Volkswagen Jetta CKD model

Nissan Sylphy New Generation model

Renault FluenceEV New Fluencevariant

D-SegmentNissan Teana

New Generation model

Toyota Camry CKD model

Mazda 6 CKD model

SUV Segment Ford EcoSport New Generation model

MPV Segment

Mazda5 New Generation model

Nissan Note New model

Nissan Serena S-Hybrid New Serenavariant, CKD model

Commercial Segment Ford Transit New Generation model, CKD model

Source: Companies

Investment risks. These include: i) unfavourable forex trends, ii) supply chaindisruption, iii) slower economic growth affecting demand for vehicles, and iv)intensified competition that could crimp margins.

Forecasts. We lift our earnings estimates for FY14-16 by 4.3%/8.7%/16%respectively, after adjusting our sales volume assumption and also tweaking themargins from the higher proportion of CKD vehicle sales volume for FY15 and FY16.

Investment case. Considering BAUTOs robust 3-year FY13-16 EPS CAGR of49.5%, we think the stock deserves to trade at a higher 12.5x (from 12x) target P/E,which remains broadly in line with peer target valuations. The implied target PE-G isonly 0.25x. Accordingly, we derive a higher target price of MYR2.20 (from MYR1.95).BAUTO currently trades at an undemanding FY15 P/E of 10.3x. Maintain BUY.

Figure 5: Key assumptions

2013 2014F 2015F 2016F

Sales volume (units) Malaysia 8,142 9,796 12,819 15,214

The Philippines 657 2,221 3,442 4,406

Average MYR/JPY 3.69 3.20 3.25 3.27

Source: Company, RHB estimates


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Financial Exhibits



Profit & Loss (MYRm) Apr-12 Apr-13 Apr-14F Apr-15F Apr-16F

Total turnover 664 1,064 1,448 1,918 2,297

Cost of sales (569) (925) (1,227) (1,642) (1,965)

Gross profit 95 139 221 276 332

Gen & admin expenses (23) (39) (53) (61) (73)

Selling expenses (15) (28) (28) (31) (36)

Operating profit 57 72 141 184 223

Operating EBITDA 62 79 150 197 240

Depreciation of fixed assets (5) (7) (9) (13) (17)

Operating EBIT 57 72 141 184 223

Net income from investments - (2) 11 16 19

Other recurring income 1 3 3 3 3

Interest income 0 1 1 1 1

Interest expense (2) (5) (5) (5) (5)

Pre-tax profit 55 70 151 199 241

Taxation (15) (17) (38) (50) (60)

Minority interests - (1) (5) (8) (10)

Profit after tax & minorities 41 52 109 142 171Reported net profit 41 52 109 142 171

Recurring net profit 41 52 109 142 171

Cash flow (MYRm) Apr-12 Apr-13 Apr-14F Apr-15F Apr-16F

Operating profit 57 72 141 184 223

Depreciation & amortisation 5 7 9 13 17

Change in working capital 46 (29) (31) (17) (31)

Other operating cash flow 1 27 (1) (1) (1)

Operating cash flow 109 78 118 180 208

Interest received 0 1 1 1 1

Interest paid (2) (5) (5) (5) (5)

Tax paid (18) (21) (38) (50) (60)

Cash flow from operations 88 53 77 126 144

Capex (3) (14) (28) (31) (26)

Other investing cash flow 0 (25) 1 1 1

Cash flow from investing activities (2) (39) (28) (31) (26)

Dividends paid - - (27) (35) (43)

Proceeds from issue of shares - 6 43 - -

Increase in debt (41) 90 (75) - -

Other financing cash flow (2) (5) (1) (1) (1)

Cash flow from financing activities (43) 91 (60) (36) (43)

Cash at beginning of period 34 77 182 172 231

Total cash generated 43 105 (11) 59 75

Implied cash at end of period 77 182 171 231 306


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Financial Exhibits



Balance Sheet (MYRm) Apr-12 Apr-13 Apr-14F Apr-15F Apr-16F

Total cash and equivalents 77 182 172 231 307

Inventories 130 194 278 342 409

Accounts receivable 31 31 40 53 63

Other current assets 3 16 10 13 16

Total current assets 241 423 499 639 794

Total investments - 23 34 50 69

Tangible fixed assets 17 20 40 58 67

Intangible assets 1 1 1 1 1

Total other assets 9 19 19 19 19

Total non-current assets 27 63 93 127 156

Total assets 267 485 592 765 950

Short-term debt 29 127 54 54 54

Accounts payable 89 124 175 234 280

Other current liabilities 12 34 34 34 34

Total current liabilities 130 285 263 322 368

Total long-term debt 11 2 - - -

Other liabilities 18 32 32 32 32Total non-current liabilities 29 35 32 32 32

Total liabilities 159 319 295 354 400

Share capital 40 360 403 403 403

Retained earnings reserve 68 79 162 268 397

Other reserves - (280) (280) (280) (280)

Shareholders' equity 108 159 285 391 520

Minority interests - 7 12 20 30

Other equity - 0 - - -

Total equity 108 166 297 411 550

Total liabilities & equity 267 485 592 765 950

Key Ratios (MYR) Apr-12 Apr-13 Apr-14F Apr-15F Apr-16F

Revenue growth (%) 12.0 60.4 36.1 32.4 19.8

Operating profit growth (%) 12.6 27.1 95.6 30.5 21.1

Net profit growth (%) 12.9 26.1 110.4 30.3 20.6

EPS growth (%) 12.9 26.1 88.0 30.3 20.6

Bv per share growth (%) 60.3 46.7 60.0 37.4 32.8

Operating margin (%) 8.5 6.8 9.7 9.6 9.7

Net profit margin (%) 6.2 4.9 7.5 7.4 7.4

Return on average assets (%) 14.4 13.7 20.2 20.9 19.9

Return on average equity (%) 46.6 38.7 49.0 41.9 37.5

Net debt to equity (%) (34.9) (31.9) (39.6) (43.1) (46.0)

DPS 0.00 0.00 0.03 0.04 0.05

Recurrent cash flow per share 0.12 0.07 0.10 0.16 0.18


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SWOT Analysis

Strong and experienced management team

Strong support from Berjaya Corporation Group ofCompanies

Mazda is an established and internationally-

acclaimed brand

Regulatorychanges affectingthe competitivelandscape of thelocal automotive

sector

Strong growthopportunity inthe Philippinesautomotivesector

Introduction offive new modelsfrom this yeartill 2016

Stiff competition in the automotive sector with manyrecent and upcoming launches of new models

Source: Company data, Error! Bookmark not defined. Source: Company data, Error! Bookmark not defined.

Company ProfileBerjaya Auto Berhad is involved in the distribution, assembling, retailing and also the provision of after sales service of Mazda vehiclesin Malaysia. The Group is also involved in the domestic distribution of locally assembled Mazda vehicles and the export of the locallyassembled Mazda vehicles.

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P/E (x) vs EPS growth

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P/B (x ) ( lhs) Return on average equi ty (r hs)


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Recommendation Chart

Source: Error! Bookmark not defined., Bloomberg

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5Recommendations & Target Price

Buy Neutral Sell TradingBuy

Take Profit Not Rated

Source: Error! Bookmark not defined., Bloomberg

Date Recommendation Target Price Price

2014-01-16 Buy 1.95 1.81


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RHB Guide to Investment Ratings

Buy:Share price may exceed 10% over the next 12 monthsTrading Buy:Share price may exceed 15% over the next 3 months, however longer-term outlook remains uncertainNeutral:Share price may fall within the range of +/- 10% over the next 12 monthsTake Profit:Target price has been attained. Look to accumulate at lower levelsSell:Share price may fall by more than 10% over the next 12 monthsNot Rated:Stock is not within regular research coverage

Disclosure & Disclaimer

All research is based on material compiled from data considered to be reliable at the time of writing, but RHB does not make any representation orwarranty, express or implied, as to its accuracy, completeness or correctness. No part of this report is to be construed as an offer or solicitation of an offerto transact any securities or financial instruments whether referred to herein or otherwise. This report is general in nature and has been prepared forinformation purposes only. It is intended for circulation to the clients of RHB and its related companies. Any recommendation contained in this report doesnot have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This report is for theinformation of addressees only and is not to be taken in substitution for the exercise of judgment by addressees, who should obtain separate legal orfinancial advice to independently evaluate the particular investments and strategies.

This report may further consist of, whether in whole or in part, summaries, research, compilations, extracts or analysis that has been prepared by RHBsstrategic, joint venture and/or business partners. No representation or warranty (express or implied) is given as to the accuracy or completeness of suchinformation and accordingly investors should make their own informed decisions before relying on the same.

RHB, its affiliates and related companies, their respective directors, associates, connected parties and/or employees may own or have positions in

securities of the company(ies) covered in this research report or any securities related thereto, and may from time to time add to, or dispose off, or may bematerially interested in any such securities. Further, RHB, its affiliates and related companies do and seek to do business w ith the company(ies) coveredin this research report and may from time to time act as market maker or have assumed an underwriting commitment in securities of such company(ies),may sell them or buy them from customers on a principal basis and may also perform or seek to perform significant investment banking, advisory orunderwriting services for or relating to such company(ies), as well as solicit such investment, advisory or other services from any entity mentioned in thisresearch report.

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Malaysia

This report is published and distributed in Malaysia by RHB Research Institute SdnBhd (233327-M), Level 11, Tower One, RHB Centre, JalanTunRazak,50400 Kuala Lumpur, a wholly-owned subsidiary of RHB Investment Bank Berhad (RHBIB), which in turn is a wholly-owned subsidiary of RHB CapitalBerhad.

Singapore

This report is published and distributed in Singapore by DMG & Partners Research Pte Ltd (Reg. No. 200808705N), a wholly-owned subsidiary of DMG &Partners Securities Pte Ltd, a joint venture between Deutsche Asia Pacific Holdings Pte Ltd (a subsidiary of Deutsche Bank Group) and OSK InvestmentBank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity is referred to as RHBIB, which in turn is a wholly-owned subsidiary of RHB Capital Berhad). DMG & Partners Securities Pte Ltd is a Member of the Singapore Exchange Securities Trading Limited. DMG &Partners Securities Pte Ltd may have received compensation from the company covered in this report for its corporate finance or its dealing activities; thisreport is therefore classified as a non-independent report.

As of 4 March 2014, DMG & Partners Securities Pte Ltd and its subsidiaries, including DMG & Partners Research Pte Ltd do not have proprietary positionsin the securities covered in this report, except for:a) -

As of 4 March 2014, none of the analysts who covered the securities in this report has an interest in such securities, except for:a) -

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This report is published and distributed in Hong Kong by RHB OSK Securities Hong Kong Limited (RHBSHK) (formerly known as OSK Securities HongKong Limited), a subsidiary of OSK Investment Bank Berhad, Malaysia which have since merged into RHB Investment Bank Berhad (the merged entity isreferred to as RHBIB), which in turn is a wholly -owned subsidiary of RHB Capital Berhad.


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RHBSHK, RHBIB and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject company.RHBSHK, RHBIB and/or other affiliates may, within the past 12 months, have received compensation and/or within the next 3 months seek to obtaincompensation for investment banking services from the subject company.

Risk Disclosure Statements

The prices of securities fluctuate, sometimes dramatically. The price of a security may move up or down, and may become valueless. It is as likely thatlosses will be incurred rather than profit made as a result of buying and selling securities. Past performance is not a guide to future performance. RHBSHKdoes not maintain a predetermined schedule for publication of research and will not necessarily update this report

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BJAUTO RHB Luncheon

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