mazda amresearch

AUTOMOBILE ASSEMBLY & DISTRIBUTION

BERJAYA AUTO BHD (BAAUTO MK) 4 April 2014

Rising scope for upside, EEV incentives kicking in

Company report BUY

AmResearch Sdn Bhd

www.amesecurities.com.my

+603 2036 2280

(Maintained)

Rationale for report: Company Visit

Price RM2.05

Fair Value RM3.00

52-week High/Low RM2.05/RM0.70

Key Changes

Fair value �

EPS �

YE to Apr FY13 FY14F FY15F FY16F

Revenue (RMmil) 1,064.4 1,464.2 1,851.2 2,007.2

Core net profit (RMmil) 50.9 127.4 155.5 196.1

EPS (Sen) 6.3 15.9 19.4 24.4

EPS growth (%) n/a 150.1 22.1 26.1

Consensus EPS (Sen) n/a 13.1 16.1 18.8

DPS (Sen) 0.0 4.0 4.8 6.1

PE (x) 32.3 12.9 10.6 8.4

EV/EBITDA (x) 18.6 8.5 7.1 5.2

Div yield (%) 0.0 2.0 2.4 3.0

ROE (%) 47.9 49.0 42.5 39.4

Net Gearing (%) n/a n/a n/a n/a

Stock and Financial Data

Shares Outstanding (million) 802.8

Market Cap (RMmil) 1,645.7

Book value (RM/share) 0.26

P/BV (x) 7.7

ROE (%) 47.9

Net Gearing (%) n/a

Major Shareholders Berjaya Group (67.6%)

Podium Success (7.1%)

Free Float (%) 25.0

Avg Daily Value (RMmil) 1.8

Price performance 3mth 6mth 12mth

Absolute (%)

Relative (%)

1,596

1,689

1,781

1,874

1,966

0.00

1.00

2.00

3.00

4.00

Nov-13

Index Points

(RM)

Berjaya Auto FBM KLCI

PP 12247/06/2013 (032380)

Investment Highlights

• We re-affirm our high conviction BUY on Berjaya Auto (BAuto)

following recent meeting sessions with management as well as a

plant visit. Our fair value is raised to RM3.00/share (from

RM2.50/share previously) after raising our earnings projections

and rolling over our valuation to CY15F earnings.

• Management expects FY14F volumes at 9K-10K units (+25%

YoY), rising by 30%-48% to 13K-14K in FY15F; these are 3%-11%

higher than our FY14F-15F estimates. The CBU 2.0 litre Mazda 3

(C-segment) was launched in mid-Mar 2014 with initial orders

hitting 150-200 units. The CKD launch, which entails a 1.5 litre

variant, is expected in Oct 2014 and should be a huge volume

kicker. Management has a volume target of 5K/annum for the

Mazda 3 (vs. our forecast of 3.2K/annum). The Mazda 6 CKD (D-

segment) will be launched in 4QFY15F at production of

250/month vs. our sales assumption of 190/month. This is the

next model slated for exports. New models in the pipeline that

we have yet to factor in include the CX3 (a high volume B-

segment SUV) and a new CX5 variant (both in FY16F).

• BAuto’s EEV incentive application for the CKD CX5 was

approved last quarter. This raises the excise duty rebates it is

enjoying by 25% from the existing base. Duty cost is huge, at up

to 40%-45% of operating cost. We estimate the CX5’s cost to

drop by 10%-11% post-incentive, mainly from 4QFY14 as CKD

production recovery becomes more pronounced. Management

targets CKDs to account for 75% of TIV in FY15F (vs. our FY14F:

44%, FY15F: 67%, FY16F: 83%) mainly due to the deviation in

Mazda 3 projection. Any higher than expected sales of the Mazda

3 means upside to both our volume and margin forecasts.

• Production at Inokom has improved to 800-900/month from 400-

500/month in the past quarter following Mazda’s assistance in

resolving production issues. A dedicated Mazda trim & final

shop will be ready by end April, which will increase capacity to

1,300-1,400/month. MMSB is also considering constructing its

own paintshop to free up the current production bottleneck,

which can further expand capacity by 80% to 2,500/month.

• We raise our projections by 4%-18% over FY15-16F (and FY14F

by 1%) to factor in higher duty savings gained from EEV

incentives and Mazda 6 exports at a rate of 4K/annum from

4QFY15. Our projections are now 20%-30% higher than

consensus. Even the strong outperformance in its recent

3QFY14 results (which exceeded consensus expectations by

22%) has yet to be reflected in the share price.

• At 10.6x FY15F PE, BAuto trades at a16% discount to the sector

despite having the strongest growth trajectory driven by a more

efficient cost base from a switch to a CKD-driven business

model. Over the past 3 months, consensus earnings have been

revised up by 23% (See Chart 2). Net cash of RM178mil (FY15F)

accounting for 12% of market cap, suggests room for acquisitive

growth. In the near-term, a recovery in Mazda TIV following its

production recovery and outperformance in upcoming 4QFY14F

results are strong catalysts.

Berjaya Auto Bhd 4 April 2014

AmResearch Sdn Bhd 2

We re-affirm our BUY call on Berjaya Auto (BAuto)

following recent meeting sessions with management

as well as a plant visit. Our fair value is raised to

RM3.00/share (from RM2.50/share previously) after

raising our earnings projections and rolling over our

valuation to CY15F earnings.

We continue to peg BAuto at 13x PE, at a premium to

sector PE due to above-industry growth rate,

exposure to high growth overseas markets in

Thailand and the Philippines and its status as the

best proxy to Malaysia’s EEV program.

Among key topics of discussion during the meetings

were:- (1) Volume targets and new model strategies

over the next 3 years; (2) Addressing production

issues which are holding back BAuto’s earnings

potential; and (3) BAuto’s status in the Energy

Efficient Vehicle (EEV) program.

� Scope for upside to volume targets

Management expects FY14F Mazda TIV of between

9,600 – 9,800 units (+25% YoY), rising by 30% to

13,000-14,000 in FY15F.

These volume targets are 3%-11% higher than our

forecast of 9,720 units for FY14F and 12,636 units for

FY15F, suggesting that there is scope for upside to our

projections, in particular FY15F which is the base year for

our valuations currently.

A key volume driver for FY14F is the launch of the CKD

CX5 in May 2013, while FY15F will be driven mainly by

the launch of the new C-segment Mazda 3.

The new Mazda 2 should help to support volumes, to a

certain extent. On top of this, the CKD Mazda 6 is likely

to be launched in the final quarter of FY15F.

� Mazda 3 positioned as a key volume kicker

The new Mazda 3 (C-segment model) was officially

launched on 19th

March with a price tag of RM139K,

while CKD launch is targeted for October 2014 – delayed

from June 2014 target due to supply constraints from

Japan.

Prior to that, the new Mazda 3 had a soft launch in

January 2014 and some 87 units have been delivered to

customers (prior to official launch).

Only variants with 2 litre engine capacity are available for

the CBU Mazda 3. Meanwhile, the CKD Mazda 3 will be

offered in 2 litre and a high volume 1.5 litre variant.

Given the duty savings derived from local assembly, the

Mazda 3’s pricing could potentially be lowered by

RM10,000-15,000 (for the 2 litre variant).

More importantly, the 1.5 litre variant (which is only

available in CKD form) can be priced within a B-

segment’s price range i.e. sub RM90,000. We expect this

model to be a critical volume driver for BAuto from

2HFY15F onwards.

Management has a base case volume target of

4,800/annum (400/month) for the new Mazda 3, and a

blue sky target of 10,000/annum (vs. our conservative

forecast of 3,200/annum, or 267/month).

Key competitors in the C-segment include the Honda

Civic, Toyota Altis and the Nissan Sylphy. While all these

models entail cheaper pricing than the CBU Mazda 3, the

1.5 litre CKD variant will be uniquely positioned at the

higher end of the high volume B-segment and at the

lowest end of the C-segment price range.

TABLE 1 : MAZDA 3 CKD UNIQUELY POSITIONED IN

BETWEEN B / C-SEGMENTS

Competing models Pricing (RM)

Toyota Altis (1.6 ) 103,676

Toyota Altis (2.0 ) 128,426

Honda Civic (1.8 - 2.0) 112,791 - 133,245

Nissan Sylphy (2.0) 111,743 - 121,483

Mazda 3 (2.0) SkyActiv (CBU) 138,935

Mazda 3 (1.5) SkyActiv (CKD) Sub 90,000

Toyota Vios (1.5) 71,105 - 89,451

Nissan Almera (1.5) 66,800 - 79,800

Honda City (1.5) 75,800 - 90,800

Source: Company / AmResearch

� The new Mazda 2 - a CBU B-segment model?

The new Mazda 2 (B-segment) is slated for launch in

4QCY14. The model will be imported as CBU from

Thailand, in line with Mazda’s broader plan to use

Thailand as a hub for small, high volume models and

Malaysia as a hub for premium, high value models.

While the B-segment is typically a volume driver, the high

duty costs that comes with a CBU does not position the

Mazda 2 favourably against rivals. Even though the

model is fuel efficient, it does not qualify for EEV

incentives as it is not assembled locally.

The current generation Mazda 2 (1.5 litre engine) is also

brought in as a CBU and is priced at RM78K-82K. Key

rivals such as the Toyota Vios and Nissan Almera

meanwhile are priced at RM60K-90K as a comparison.

The Mitsubishi Attrage, which is an Eco Car qualified

model is imported as CBU but priced at RM59K-75K,

albeit with a smaller 1.2 litre engine.

Indications are that the new Mazda 2 will also be

manufactured in 1.5 litre variants in Thailand, which

means it will not qualify for Thailand’s Eco Car program

either, given a ceiling of 1.4 litre engines for the Eco Car

program.

It is understood that Mazda Japan is considering using a

1.3 litre SkyActiv engine (from the Demio) specifically for



the Mazda 2 models to be produced in Thailand, but

tweaks will have to be done as the 1.3 litre engine may

not be able to achieve sufficient fuel economy to qualify

for the Eco Car program. The Mazda 2’s body and weight

was designed to be powered by a 1.5 litre engine.

Mazda is the only major Japanese player that has yet to

participate in Thailand’s Eco Car program and if the

Mazda 2 does not qualify, the model will be priced at a

disadvantage against local competition such as the

Toyota Yaris and Nissan March. Thailand’s Eco Car

program entails a reduction in luxury tax to 14% vs. 30%

imposed on non-Eco Cars.

Unlike most of its rivals, Mazda does not have much

choice in choosing cars for the Eco Car project as the

Mazda 2 is the only model in its global portfolio that has

the potential to qualify for the program.

And unlike Malaysia’s EEV program which covers the

whole spectrum of passenger vehicles, Thailand’s Eco

Car program is solely focused on the compact car

segment.

� CKD Mazda 6, the next export kicker

The SkyActiv Mazda 6 was launched in CBU form in April

2013. The model is currently sold in 2 litre and 2.5 litre

variants priced at RM159K and 189K respectively and

generates collective volumes of 160-170/month, on

average.

From 1QCY15, the Mazda 6 will be locally assembled at

the Inokom plant. As an indication, the CKD variant could

be priced up to RM20,000 cheaper than the CBU version

given the excise duty savings i.e. RM139K for the 2 litre

variant and 169K for the 2.5 litre variant on our estimates,

cheaper than key rivals; the Honda Accord 2 litre priced

at RM139K-146K and Toyota Camry 2 litre priced at

RM149K-158K.

More importantly, the Mazda 6 is also the next model

slated for exports to Thailand after the CX5. Based on

current production plans, circa 3,000-4,000 per annum

capacity will be allocated for Malaysia and another 4,000-

5,000/annum for exports to Thailand.

TABLE 2 : LIST OF NEW LAUNCHES

Potential New Launches

Segment Key competitors FY14F

CX5 CKD

C-segment SUV

Honda CRV / Nissan X-Trail / Kia Sportage

Mazda 6 CBU D-segment

Toyota Camry / Honda Accrod / Nissan Teana / Kia Optima / Hyundai Sonata

Biante MPV Nissan Serena / Toyota Avanza

Mazda 3 CBU C-segment Toyota Altis / Honda Civic / Nissan Sylphy

FY15F

Mazda 3 CKD C-segment

Toyota Altis / Honda Civic / Nissan Sylphy / Toyota Vios / Honda City

Mazda 6 CKD D-segment

Toyota Camry / Honda Accrod / Nissan Teana / Kia Optima / Hyundai Sonata

Mazda 2 CBU B-segment Toyota Vioa / Honda City / Nissan Almera

FY16F

CX5 (7-seater variant)

C-segment SUV

Honda CRV / Nissan X-Trail / Kia Sportage

CX3 B-segment SUV Toyota Rush




SUPPLY ISSUES BEING ADDRESSED

� CBUs as stop-gap to meet overwhelming demand

BAuto has brought in 600 CBU units of the CX5 (2.5 litre

variants) to address overwhelming demand and

production hiccups at the Inokom plant. These higher

spec and higher capacity CBUs are sold at circa

RM10,000-15,000 higher than the highest 2 litre CKD

variant, and priority goes to customers who are already in

the waiting list.

Circa 500 units have been delivered and BAuto is in talks

with Mazda Japan to bring in an additional 300 units this

month, on top of the initial batch.

BAuto has an overall booking bank of up to 3,000 units –

comprising mainly of the CX5 and to a certain extent, the

Biante. This is equivalent to circa four months waiting list

in general and up to six months specifically for the CX5.

Demand is clearly not an issue at this point for BAuto, but

rather, it is supply constraint that is holding back the

group’s earnings potential.

� Production hiccups being addressed

The production issues at the Inokom plant are expected

to be gradually resolved - Mazda has sent their

production team to assist and we gather that production

has already improved to 800-900 a month from 400-500

a month in the past quarter.

The issues faced are mainly rigid quality issues (rather

than safety issues) and problems arose from manpower

skills.

It is unofficially agreed with Mazda Japan that 60% of

available capacity at the group’s Inokom plant will be

allocated for exports to Thailand and 40% for the

domestic market. However, this is not a cast-in-stone

arrangement and there is flexibility in the allocation.

� New trim & final shop ready by April

Currently, MMSB only owns its own body shop (which

entails the welding of the basic frame of the car up to the

fitting of body parts that come as part of CKD packs).

The rest of the processes i.e. paintshop and trim & final

shop and inspection are outsourced to Inokom, where

available capacity has to be shared with other models

that Inokom contract assembles.

MMSB’s new trim & final shop (which is dedicated for

Mazda production) will be ready by end April 2014. This

will expand Mazda’s current trim & final shop’s production

rate from 4-5 Jobs per Hour (JPH) to 7-8 JPH.

The higher JPH extracted from the MMSB’s own

dedicated trim & final shop translates into absolute

installed capacity expansion from 10,000-12,000/annum

up to 16,000/annum (on our estimates, based on

5day/week runs).

However, the capacity expansion is specifically for the

trim & final process and a bottleneck still arises from the

paintshop’s limited capacity.

� New paintshop to free up more capacity

Management is in discussions to construct its own

paintshop at Inokom to free up the bottleneck at its plant.

Currently, BAuto is outsourcing the paint process to

Inokom as part of its contract assembly arrangement.

The existing paintshop facility provided by Inokom can

provide a capacity of up to 10,000/annum specifically for

Mazda, and further improvements are in the works to

increase this up to 20,000/annum to match Mazda’s

dedicated trim & final shop’s capacity, once it is up and

running.

If MMSB proceeds with its own paintshop, total capex is

estimated at RM80-100mil. Mazda’s own paintshop can

further expand installed capacity to 30,000/annum.

Construction is expected to take between 8 to 12 months,

once a decision is finalised.

We see this as another catalyst for BAuto as the freeing

up of production capacity will allow for more, higher

margin CKD models to be produced locally.

� Light capex, high growth

Additionally, the increase in MMSB’s own dedicated

production processes (which comes with MMSB’s own

investments) should come with a reduction in contract

assembly fees paid to Inokom as production processes

outsourced to the latter gradually lessen.

It is also important to bear in mind that BAuto only owns a

30% stake in MMSB, which means the improvement in

production comes at little incremental investment as the

majority is taken up by Mazda Japan (which holds 70% in

MMSB).



COST REDUCTION KICKING IN

� Incremental duty rebates kicking in

BAuto had its EEV (Energy Efficient Vehicle program)

incentive application for the CX5 approved last quarter.

This raises its excise duty rebates by 25% from the

existing base. As production of the CKD CX5 is gradually

raised (and accounts for a bigger proportion of sales),

savings from the duty rebates will be more pronounced.

We estimate CKD CX5 overall cost to drop by 10%-11%

post-incentive, which will be mainly reflected from

4QFY14 onwards as production recovery becomes more

significant.

CKDs are expected to account for 67% of sales in FY15F

from a mix of the CX5 and Mazda 3, (FY14F: 44% -

entirely form the CX5) rising to 83% in FY16F – full year

impact of Mazda 6 and Mazda 3 CKD. Management has

a more aggressive target of 75% of sales coming from

CKD models in FY15F.

We understand that most of the new generation SkyActiv-

equipped Mazda models stand to qualify for Malaysia’s

EEV program and hence, will benefit from similar excise

duty rebates.

Despite benefits from the duty incentives, we

conservatively expect operating margins to ease slightly

to 10.3% in FY15F (vs. 11.2% in FY14F) as the 1.5 litre

CKD Mazda 3 is expected to be a volume-driven model

with lower base margins than the CX5. Nonetheless,

Fy16F should see stronger margins of close to 12% once

the Mazda 6 CKD kicks in meaningfully.

� SkyActiv technology in brief

“SkyActiv technology” encompasses innovations in various

components of a car (such as engine, transmission,

chassis and a lightweight body frame) to achieve

significant fuel efficiency and improvements in drive

capability e.g. improved torque (See next section of this

report for more details on Mazda’s SkyActiv technology).

Since the global launch of the first SkyActiv model in 2012,

the response for SkyActiv equipped models has been

overwhelming;utilising this high brand value, Mazda aims

to reduce reliance on price discounting to push its products

through in the market.

With the global launch of the new Mazda CX5 from

February 2012 as an opening round, Mazda plans to

globally release eight new models fully equipped with

SkyActiv technology over the next 4-5 years.

Mazda Japan estimates that the number of SkyActiv

equipped models as a percentage of total sales to increase

to 80% by March 2016 from 30% in fiscal year March 2013.

CHART 1 : PERCENTAGE OF SKYACTIV VEHICLES


� Qualifying for EEV status

Unlike Thailand’s Eco-Car program which limits

qualification only for vehicles <1.2 litre (for gasoline

engines); Malaysia’s EEV program is a lot more

comprehensive and consist of the whole spectrum of

passenger vehicles.

Qualification for the different classes of passenger vehicles

entails different fuel efficiency requirements.

The CX5 is Mazda’s first model introduced in Malaysia that

is equipped with SkyActiv technology. The model can

achieve fuel efficiency of up to 6.9 litres/100km based on

Mazda’s tests (12%-21% more efficient) versus a typical

7.8 - 8.7 litres/100km for other models in its class (See

Table 4-5).

Given the significant fuel efficiency that the CX5 is able to

achieve via the SkyActiv technologies, the model is

qualified as an EEV. Being qualified as an EEV status

model gives the CX5 exceptionally higher excise duty

rebates compared to non-EEV models that are assembled

locally, hence giving it a strong competitive edge of having

a lower cost base and improved price positioning

capability.

TABLE 3 : EEV FUEL EFFICIENCY REQUIREMENT

Segments Kerb weight

(kg)

Fuel efficiency

requirement (litre/100km) Details

A <800 4.5 Micro Car

801 - 1000 5.0 City car

B 1001 - 1250 6.0 Super Minicar

C 1251 - 1400 6.5 Small Family Car

D 1401 - 1550 7.0 Large Family Car/

Compact Executive Car

E 1550 - 1800 9.5 Executive Car

F 1801 - 2050 11.0 Luxury Car

J 2051 - 2350 11.5 Large 4x4

Others 2351 - 2500 12.0 Others

Source: MITI, AmResearch estimates



TABLE 4 : SKYACTIV CX5 SUPERIOR FUEL EFFICIENCY

Fuel consumption (litre per 100km)

Mazda CX5 (2.0) SkyActiv 6.9

Honda CRV (2.0) 7.8

Nissan X-Trail (2.0) 8.4

Hyundai Santa Fe (2.0) 8.5

Kia Sportage (2.0) 8.7

Source: Various / AmResearch

TABLE 5 : SKYACTIV MAZDA 3 FUEL EFFICIENCY

Fuel consumption (litre per 100km)

Mazda 3 (2.0) SkyActiv 6.6

Mazda 3 (1.5) SkyActiv 4.7*

Toyota Vios (1.5) 6.3

Nissan Almera (1.5) 6.7

Honda City (1.5) 7.1 * Exact technical information yet to be released by Mazda, based on various external reviews

Source: Various / AmResearch

� More duty savings for EEV qualified models

Technically, the CX5 is estimated to have achieved 40%

localisation rate – which means that 60% of the CX5’s ex-

factory cost is charged by the 75% official Malaysian

excise duty rate (for <2 litre SUVs) - whereby this works

out to an effective excise duty payment of 45%.

However, given the incremental excise duty rebates

awarded to EEV qualified models, we estimate the

effective excise duties paid for the CX5 is driven down

further to circa 38% (from 45%), allowing the model:- (1)

To be priced competitively against other locally assembled

models competing in the same segment (See Table 6);

and (2) Effective excise duty rate which is comparable to

Thailand’s 35% for <2.4 litre SUVs.

TABLE 6 : CX5 PRICED COMPETITIVELY VS. CKD PEERS

Price (RM/unit)

Mazda CX5 (2.0) SkyActiv (CKD) 136,943 - 154,385

Honda CRV (2.0) (CKD) 148,800

Nissan X-Trail (2.0) (CKD) 148,800


� How do the duty incentives work?

Auto manufacturers and distributors are the key

beneficiaries of the duty incentives offered under the EEV

program. Under a modified IAF (Industrial Adjustment

Fund) system, instead of the dollar-to-dollar excise duty

rebate system, regulators are expected to extend the

matching system on a multiplier basis.

As an example, assuming a particular model achieves

50% localisation rate, but is awarded an IAF multiplier of

1.5x; the model is considered to have a localisation rate of

75% and therefore only 25% of the content of the vehicle is

chargeable by excise duties. In short every Ringgit value of

component that is localised will be matched by RM1.50 in

excise duty rebate (in the case of a 1.5x IAF multiplier).

To be more specific, say for example, a car that entails ex-

factory cost of RM100,000, of which RM50,000 of the cost

is derived from Malaysia (i.e. a 50% localisation rate);

under the current IAF system, the amount of excise duty

charged on the car would be 75% (i.e. we use the duty rate

for a 1.5 litre B-segment model) on the value of imported

kits (in this case, RM50,000), translating into an absolute

excise duty charge of RM37,500.

However, with an IAF multiplier of 1.5x, the localisation

rate is artificially increased to 75%, meaning only

RM25,000 (or 25%) of the vehicle content is charged with

the 75% excise duty rate, translating into total excise duty

cost of just RM18,750.

This is 50% lower than the excise duty payable of

RM37,500 without the IAF multiplier, as explained in the

prior paragraph. This also translates into an effective

excise duty rate of just 18.8% (i.e. RM18,750/RM100,000)

versus the average 40%-50% that most non-nationals are

paying currently (See Table 7).

With the adjustment to the IAF system, Malaysia’s vehicle

excise duty structure becomes a lot more competitive

relative to that of Thailand’s 17%-40% and Indonesia’s

30%-75%, which does not practice a localisation-driven

excise duty rebate system like Malaysia.

TABLE 7 : EXAMPLE ON IMPACT OF IAF ADJUSTMENT

Current scenario (RM) - typical localisation rate of 50% for non-national

A Total cost of a car 100,000

B of which: Local cost 50,000

C of which: Imported cost 50,000

B / A Localisation rate 50.0%

D Excise duty rate 75.0%

E = D x C Excise duty paid 37,500

F = E / A Effective excise duty rate 37.5%

EEV scenario (RM) - typical localisation rate of 50% for non-national




D = B / A Localisation rate 50.0%

E Excise duty rate 75.0%

F IAF multiplier 1.5

G = F x D Localisation rate post-IAF 75.0%

H = (1 - G) x A Effective imported cost post-IAF 25,000

I = E x H Excise duty paid 18,750

J = I / A Effective excise duty rate 18.8%

Source: Company, AmResearch estimates

As the IAF multiplier offered under the EEV incentive

scheme ranges from 1.1x to 1.6x, this means that local

players have the opportunity to lower excise duty cost by

up to 60% from the current base.



The incentive will have a significant impact on cost saving

(and potentially car pricing if passed on to consumers) as

excise duty cost accounts for up to 30%-40% of the cost of

sales of a car manufacturer currently.

More importantly, if a manufacturer increases an EEV

model’s “base” localisation rate to circa 65% (using the

same example), the effective excise duty rate paid by

manufacturers can reduce to almost zero (See Table 8).

TABLE 8 : EFFECTIVE DUTY CAN REDUCE TO ALMOST 0%

EEV scenario (RM) - assuming localisation rate increases to 65%




D = B / A Localisation rate 65.0%

E Excise duty rate 75.0%

F IAF multiplier 1.5

G = F x D Localisation rate post-IAF 97.5%

H = (1 - G) x A Effective imported cost post-IAF 2,500

I = E x H Excise duty paid 1,875

J = I / A Effective excise duty rate 1.9%


WHERE WE STAND AGAINST CONSENSUS?

FY15F’s 30% growth in volumes, mainly driven by the

Mazda 3, should drive earnings up by 22%. Meanwhile,

FY16F’s 26% earnings growth will be driven by a

combination of margin expansion (from 10.3% to 11.9%)

on top of a 10% volume growth driven by the CKD Mazda

6 and introduction of the CX3 towards 2HFY16F.

As it is, our current projections are already 20%-30%

higher than consensus over FY14F-16F and there is

potential for further upside against our conservative

volume forecast for the Mazda 3, in particular.

� Key deviation against consensus?

A notable area of deviation between our forecast and

consensus is BAuto’s operating margin. AmResearch

forecasts operating margins of 11.2% (FY14F), 10.3%

(FY15F) and 11.9% (FY16F), which are markedly higher

than consensus’ 9% (FY14F), 8.4% (FY15) and 9.3%

(FY16F).

As of 9MFY14 results, BAuto had already achieved

operating margins of 10.9% (and 13.5% specifically for

3QFY14). This is perhaps, a key area of upside to look

forward to in terms of consensus earnings revision in the

near-term.

The expansion in BAuto’s operating margins from a mere

7% in FY13 was driven mainly by the gradual

transformation to a CKD-driven business model, which

has been at the core of our investment thesis, on top of

EEV incentives and production recovery which will further

support margin expansion going forward.

As it is, the strong outperformance in BAuto’s 3QFY14

results (which exceeded consensus expectations by 22%

if annualised) has yet to be reflected in the share price.

At 10x FY15F PE, BAuto is trading at 16% discount to

sector average despite having the strongest growth

trajectory driven by rising cost efficiency from a switch to

a CKD-driven business model. Over the past 3 months,

consensus earnings have been revised up by 23%.

Net cash of RM178mil (FY15F) accounting for 12% of

market cap, suggests room for acquisitive growth. In the

near-term, a recovery in Mazda TIV following its

production recovery and outperformance in upcoming

4QFY14F results are strong catalysts.

CHART 2 : BAUTO EARNINGS REVISION TREND

Source: Bloomberg / AmResearch



APPENDIX: THE INOKOM PLANT IN BRIEF

Inokom is a contract assembly plant majority owned by

Sime Darby (51% stake).

Other minority holders of the plant are Berjaya Corporation

(15%), Pesumal (14%), Hyundai Motor Company (15%)

and Sime Darby-Hyundai (5%).

The Inokom plant has a total capacity of 30K-40K/annum

on two shifts, but production is highly scalable.

Current built-up area of the plant consumes 95 acres of

land, but there is still huge unutilised land of 105 acres to

expand on. Inokom has an authorised capital of RM500mil

with paid up capital of RM100mil currently.

MMSB is a 70:30 JV between Mazda Corporation and

BAuto which houses the group’s manufacturing operations

in Malaysia. It has a paid up capital of RM100mil currently.

MMSB’s investment at this juncture, is in the body shop

within Inokom’s plant area. The body shop which is fully

funded by MMSB is a dedicated body shop for Mazda

models.

Other production processes i.e. paintshop and trim & final

shop are contracted out to Inokom, hence are shared with

other makes that are contract assembled by Inokom.

MMSB pays Inokom contract assembly fees for the

paintshop and trim & final processes, while for the body

shop (which is owned by MMSB), payments are only for

overheads and labour provided by Inokom. There are also

land lease payments to Inokom for the bodyshop that

MMSB owns within Inokom’s land area.

As more and more processes are undertaken by MMSB

itself, contract assembly fees paid to Inokom should

reduce from the current estimated USD2000-3000 per car.



TABLE 9 : FINANCIAL DATA

Income Statement (RMmil, YE 30 Apr) 2013 2014F 2015F 2016F

Revenue 1,064.4 1,464.2 1,851.2 2,007.2

EBITDA 81.7 173.9 202.2 253.5

Depreciation (6.1) (9.4) (11.9) (13.7)

Operating income (EBIT) 75.6 164.5 190 239.8

Other income & associates (1.5) 10.1 19.4 24.1

Net interest (4.8) (1.8) (0.3) (0.3)

Exceptional items 0.0 0.0 0.0 0.0

Pretax profit 69.3 172.8 209.3 263.5

Taxation (17.2) (40.7) (47.5) (59.9)

Minorities/pref dividends (1.2) (4.7) (6.3) (7.6)

Net profit 50.9 127.4 155.5 196.1

Core net profit 50.9 127.4 155.5 196.1

Balance Sheet (RMmil, YE 30 Apr) 2013 2014F 2015F 2016F

Fixed assets 20.3 30.2 37.5 43.0

Intangible assets 0.5 0.5 0.5 0.5

Other long-term assets 41.8 56.4 75.7 99.8

Total non-current assets 62.6 87.0 113.7 143.3

Cash & equivalent 240.0 182.2 186.8 291.1

Stock 193.8 266.6 337.0 365.4

Trade debtors 31.4 43.2 54.6 59.2

Other current assets 15.6 15.6 15.6 15.6

Total current assets 480.8 507.6 594.1 731.4

Trade creditors 83.2 114.4 144.6 156.8

Short-term borrowings 126.6 46.6 6.6 6.6

Other current liabilities 79.2 79.2 79.2 79.2

Total current liabilities 288.9 240.1 230.4 242.5

Long-term borrowings 2.4 2.4 2.4 2.4

Other long-term liabilities 32.2 32.2 32.2 32.2

Total long-term liabilities 34.7 34.7 34.7 34.7

Shareholders’ funds 212.6 307.9 424.5 571.5

Minority interests 7.3 12.0 18.3 25.9

BV/share (RM) 0.26 0.38 0.53 0.71

Cash Flow (RMmil, YE 30 Apr) 2013 2014F 2015F 2016F

Pretax profit 69.3 172.8 209.3 263.5

Depreciation 6.1 9.4 11.9 13.7

Net change in working capital 126.3 (53.3) (51.6) (20.8)

Others (148.6) (50.0) (66.1) (83.1)

Cash flow from operations 53.1 78.9 103.5 173.3

Capital expenditure (14.2) (20.0) (20.0) (20.0)

Net investments & sale of fixed assets (25.5) (4.5) 0.0 0.0

Others 0.9 0.0 0.0 0.0

Cash flow from investing (38.8) (24.5) (20.0) (20.0)

Debt raised/(repaid) 89.6 (80.0) (40.0) 0.0

Equity raised/(repaid) 64.2 0.0 0.0 0.0

Dividends paid 0.0 (32.1) (38.9) (49.0)

Others (5.2) 0.0 0.0 0.0

Cash flow from financing 148.5 (112.1) (78.9) (49.0)

Net cash flow 162.8 (57.8) 4.6 104.3

Net cash/(debt) b/f 77.2 240.0 182.2 186.8

Net cash/(debt) c/f 240.0 182.2 186.8 291.1

Key Ratios (YE 30 Apr) 2013 2014F 2015F 2016F

Revenue growth (%) n/a 37.6 26.4 8.4

EBITDA growth (%) n/a 112.9 16.2 25.4

Pretax margins (%) 6.5 11.8 11.3 13.1

Net profit margins (%) 4.8 8.7 8.4 9.8

Interest cover (x) 15.7 90.0 565.7 713.0

Effective tax rate (%) 24.8 23.5 22.7 22.7

Net dividend payout (%) 0.0 25.2 25.0 25.0

Debtors turnover (days) n/a 9 10 10

Stock turnover (days) n/a 57 60 64

Creditors turnover (days) n/a 25 26 27




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AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15 t h F l oo r B a ng un an A mB a n k Gr o u p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 2 07 0- 2 4 4 4 ( r e sea rc h ) F a x: ( 03 ) 2 07 8- 3 1 6 2

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AmResearch Sdn Bhd (335015-P) (A member of the AmInvestment Bank Group) 15 t h F l oo r B a ng un an A mB a n k Gr o u p 55 Jalan Raja Chulan 50200 Kuala Lumpur Tel: ( 03 ) 2 07 0- 2 4 4 4 ( r e sea rc h ) F a x: ( 03 ) 2 07 8- 3 1 6 2

The information and opinions in this report were prepared by AmResearch Sdn Bhd. The investments discussed or recommended in this report may not be suitable for all investors. This report has been prepared for information purposes only and is not an offer to sell or a solicitation to buy any securities. The directors and employees of AmResearch Sdn Bhd may from time to time have a position in or with the securities mentioned herein. Members of the AmInvestment Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein. The information herein was obtained or derived from sources that we believe are reliable, but while all reasonable care has been taken to ensure that stated facts are accurate and opinions fair and reasonable, we do not represent that it is accurate or complete and it should not be relied upon as such. No liability can be accepted for any loss that may arise from the use of this report. All opinions and estimates included in this report constitute our judgement as of this date and are subject to change without notice.

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