Bermaz Auto Bhd
(March 27, RM2.29)
Maintain buy with an unchanged fair value (FV) of RM3.16: We maintain our “buy” call with an unchanged FV of RM3.16 a share on Bermaz Auto Bhd (BAuto) based on a forecasted financial year of 2020 (FY20F) price to earnings ratio (PE) of 14 times.

 
The group has a slew of new launches planned throughout 2019: June — Mazda 3 (completely built- up [CBU]), Mazda 6 (CBU); September — CX-8 (completely knocked-down [CKD]), CX-5 Turbo (CKD); December — CX30(CBU). We believe that the upcoming launches of the CX-8 and CX-30 will further fortify BAuto’s position in the sports utility vehicle (SUV) market. It will fill in the gaps in its present SUV offerings, thus providing a wider range of models priced from RM120,000 to RM290,000 to meet the needs of buyers from all segments of the SUV market. The CX-30 fits comfortably between the CX-3 and CX-5 while the CX-8 is a 7-seater priced higher than the CX-5 to yield higher level of profit. SUV sales accounted for 81% of its total sales in CY2018 with 12,700 units sold. Mazda is the second-largest player in the local SUV market with an 18% market share. It is trailing behind Honda with sales of 22,400 units and market share of 31%.

The group’s approach to provide an extensive range of models to strengthen its market position for SUVs is a positive one. This is a marked difference to the current market leader, Honda. which has limited models and is volume-based, focused in their strategy.

The soon-to-be locally assembled CX-8 will replace the Mazda 3 as the group’s second CKD model. We believe the group’s sales target for CX-8 of 2,000 and 3,600 units annually for domestic and export sales respectively is achievable.

Within the local market, the brand new CX-8 sees competition from older models from the likes of Toyota Fortuner (from RM170,000), Mitsubishi Outlander (RM143,000), Peugeot 5008 (RM173,000) and Isuzu Mu-X (RM177,000). Nevertheless, the CX-8 is priced more attractively compared to the Volvo XC90 (RM374,000) and Audi Q7 (RM600,000)

Besides, CX-8 exports will build on the strong demand for Mazda SUVs in Thailand and Indonesia. Notably, sales in Thailand have been strong. SUV sales in the country in 2018 seen rising by 44% year on year (y-o-y) to 82,000 units (2017: 57,000 units). It was significantly higher than Malaysia’s 16% y-o-y growth to 72,500 units in 2018.

Associate earnings from 30%-owned Mazda Malaysia Sdn Bhd should benefit from the CX8, which is projected to raise exports by nearly a third to 1,200 units a month. With the CX-8 positioned between CX-5 and CX-9, it could cannibalise some of CX-5’s sales. Although CX-5 remains a key model for Mazda, any cannibalisation impact by CX-8 will be less severe as the former’s sales is gradually tapering off. Sales of CX-5 are likely to ease further from its peak until the arrival of an update.

We believe the group will be able to hold its net margin close to the level of 10%-11% it has reaped in the past three quarters. This will be supported by the launch of several new models (Mazda 3 CBU, CX-5 Turbo and CX-8 CKD) focusing on generating higher margins with minimal expenses on advertisements and promotions.

We believe BAuto’s earnings will be supported from the strong domestic sales and associate earnings. The addition of new models to include new CKDs should auger well for its sales in the medium term. — AmInvestment Bank March 27