Auto Statistics: 1H15 review (Special Feature - Cycle & Carriage Bintang), Results: Globetronics Technologies (GTB MK; BUY; TP: MYR6.80)

We have:

     I.        June’s auto statistics and a special feature on Cycle & Carriage Bintang (CNCB MK, Not-rated)

    II.        Globetronics’ 2Q15 results

Automotive (NEUTRAL) - 1H15 TIV within expectations

• Jun 2015 TIV picked up further, growing 12% MoM to 57.4k units. This follows a recovery in May 2015 (+13% MoM) after a 33% MoM fall in Apr 2015, the first month of GST implementation. Jun 2015 TIV takes 1H15 TIV to 322.2k (-3% YoY), meeting 49% of our full year forecast of 660k (-1% YoY).
• A stronger 2H15 up to 338k units in 2H15 (56.3k units/month) is expected, in order to meet our 2015 TIV forecast of 660k units (-1% YoY) fuelled by aggressive sales campaigns by dealers to meet their targets. However, we caution that this will come at the expense of margins due to higher A&Ps.
• No change in our views & picks. Our 2015 TIV forecast and NEUTRAL stance is unchanged. Our Top Pick remains with MBM which will benefit from its 22.6% associate stake in Perodua whose recent success in vehicle sales growth. We still like BAuto for its: (i) attractive launches and (ii) presence in the Philippines (5M15 TIV: +20% YoY).
• Mercedes Benz vehicle sales jumped 52% YoY in 1H15. Mercedes Benz Malaysia, the exclusive distributor of Mercedes Benz cars in Malaysia, recorded its best ever 1H vehicle sales this year - backed by popular demand for its new model launches (i.e. CLA & GLA) and refreshed model line-up (i.e. A, B, C & S-Class).

The two biggest dealers for Mercedes Benz cars in Malaysia are (i) Cycle & Carriage Bintang (CNCB MK, Not-rated), a pure car dealer holding a 49%-stake in Mercedes Benz Malaysia, and (ii) Hap Seng Consolidated (HAP MK, Not-rated), a conglomerate with seven core businesses. Together, they accounted for about 70% of 2014 Mercedes Benz car sales in Malaysia.

Special feature: Cycle & Carriage Bintang (CNCB MK, Not-rated) - A pure proxy to Mercedes Benz’s tremendous growth

• Background. 59%-owned by Singapore-listed Jardine Cycle & Carriage,  CNCB has the largest Mercedes Benz dealership in Malaysia, for both new and used vehicles. CNCB also holds a 49% stake in Class B shares of Mercedes Benz Malaysia - sitting in CNCB’s balance sheet as available-for-sale investments at a book value of MYR66m since 2003. As part of the agreement, CNCB is entitled to receive an annual return for its shareholding, in place of profit participation. Meanwhile, DaimlerChrysler AG owns the remaining 51% of Mercedes Benz Malaysia in Class A shares.
• 1H15 net profit jumped almost 7-fold YoY. CNCB reported a net profit of MYR10m in FY14 (+2.5x YoY) - would have been higher if not for the absence of a yearly dividend of MYR11.2m from Mercedes Benz Malaysia (due to change in accounting policy). Note that Mercedes Benz Malaysia has consistently paid out MYR11.2m as yearly dividend to CNCB over the past 10 years and have declared its latest dividend to CNCB in its 2Q15 results. Coupled with a jump in vehicle sales, CNCB’s 1H15 net profit surged 6.6x YoY to MYR28.5m (MYR17.2m excluding dividend income from Mercedes Benz Malaysia; +3.6x YoY).

Simplistically, assuming flat QoQ revenue and vehicle sales growth (as with 2Q15) given its decent order backlog, CNCB’s normalized quarterly profits for the next two quarters could range within MYR10m per quarter which could bring prospective FY15 net profit to MYR48m.

• Deep in value and Shariah compliant. At a prospective FY15 net profit of MYR48m, CNCB is undervalued at ~6.5x PER (62% discount to sector’s FY15 valuations of 17x). This excludes the value of its 49%-stake in Mercedes Benz Malaysia. CNCB has stopped paying dividends since 2013 following a plunge in profits, but this could resume following a strong recovery in profits in 2015.

Results: Globetronics Technologies (GTB MK; BUY; TP: MYR6.80) – No surprises

• 1H15 earnings in line; no interim dividends. 2Q15 net profit of MYR18m (+5% QoQ, +4% YoY) took 1H15 earnings to MYR35m (+12% YoY), meeting 48%/46% of our and consensus full-year forecasts. Demand for its sensor products (billed to its Swiss customer in Singapore) continued to sustain in 2Q15 at MYR37m (+1% QoQ, +29% YoY), indicating still a decent 6 months outlook at its end-client, a leading premium smart devices maker. 
• Forecasts unchanged. We expect 2H15 results to be slightly stronger HoH: Globetronics is expected to kick-start its shipments of the new 3D-imaging sensor in late-4Q15 for the production of next generation smartphones to be launched in 3Q16. Meanwhile, growth in 2016 will be driven by the demand for its 3D-imaging sensors which is expected to hit full volume loading (~34m units/month) from March 2016 onwards.
• Why do we like this counter? We like Globetronics for its (i) impeccable profit track record, (ii) strong ability in securing new customers/products outsourcing contracts and (iii) positive exposure to the stronger USD/MYR forex. Net cash continues to strengthen to MYR162m at end-2Q15 (vs MYR144m end-1Q15), translating into an ex-cash FY16 PER of just 13.8x. Maintain BUY.