Bermaz Auto (BAUTO MK; HOLD; TP: MYR2.00) - Below ours but within street’s

V.S. Industry (VSI MK; BUY; TP: MYR2.85) – Within ours but beat street’s

• And it gets better. 9MFY7/17 core net profit of MYR122m (+14% YoY) met our expectation at 71% of our full-year forecast but beat streets’ estimate at 75%. We expect 4QFY17 net profit to sustain at MYR50m-58m to meet our FY17 net profit forecast of MYR172m. Our forecasts are unchanged but we see further upside in the Malaysian operation should the box-build operation progresses faster than expected. We lift TP to MYR2.85 (+25%), pegging a 17.5x CY18 PER (average PER peg for technology stocks within our coverage; previously 14x CY18 PER).
• Five consecutive quarters of QoQ earnings growth. QoQ, 3QFY17 core net profit continued to improve (+32% QoQ) to MYR50m (+162% YoY) on the back of a 39%/44% jump in Malaysia revenue/pre-tax profit, underpinned by the commencement of the box-build contract for its key consumer electronics customer. However, pre-tax profit contribution from its China operation via VSIG (1002 HK, Not Rated) fell 72% QoQ due to seasonal factors on lower demand of air purifiers.
• Setting a new standard of quarterly results. The commencement of mass-production in its two new box-build manufacturing lines has set a new standard for VSI’s Malaysia operation in terms of revenue and earnings. We expect this ~MYR600+m quarterly revenue performance (a new high for VSI) to sustain with upside.

Bermaz Auto (BAUTO MK; HOLD; TP: MYR2.00) - Below ours but within street’s

• Recovery in motion. 4QFY4/17 earnings fell short, largely on higher operating expenses (likely A&P to clear the existing CX-5 model). FY17 is likely the bottom for BAuto with exciting launches ahead; the new CX-5 is set to be launched by Oct 2017. Our FY18-19 earnings forecasts are marginally tweaked (-1%-3%). Correspondingly, our TP is trimmed by 5sen to MYR2.00, pegged on unchanged 12.5x CY18 PER (-0.5SD of mean). Maintain HOLD for decent 5+% dividend yields.
• 4QFY17 operating margins fell 3.9ppts QoQ. 4QFY17 core net profit of MYR22m (-12% QoQ, -56% YoY) took FY17 core earnings to MYR120m (-40% YoY), meeting 93%/100% of our/consensus forecasts. The key culprit behind 4QFY17’s shortfall was a 3.9ppts QoQ lower operating margins, mainly coming from Malaysian operations. We believe that this is likely due to higher A&P expenses in order to clear its existing inventories of best-seller CX-5 model ahead of a model change by Oct 2017. Fortunately, this sharp margin contraction was partially mitigated by higher associates’ income which stemmed from higher production volumes at the 29%-owned Inokom and 30%-owned MMSB operations. A fourth interim DPS of 3.15sen (to go ex 7 Jul 2017) lifted FY17 DPS to 11.65sen (FY16: 16.9sen) – within expectations.
• Still too early to be re-rated. With the new CX-5 targeted to be launched only by Oct 2017, BAuto would likely see another two quarters of low operating margins before seeing some recoveries. Nonetheless, we believe that BAuto’s earnings have bottomed in FY17; the new CX-5 should lift Group revenue as well as associates’ income as this new model is also earmarked for exports. Also, a sustained strength in MYR against JPY below 3.90 could offer faster earnings recovery.