FW: Rating upgrade: Bermaz Auto (BUY; TP: MYR2.45), Aug Auto Stats: MY Automotive (POSITIVE)

 

Good morning,

 

Rating upgrade: Bermaz Auto (BUY; TP: MYR2.45) – The worst is over; U/G to BUY

• Time to shift the gear up. We turn upbeat on BAuto as we believe that quarterly earnings have seen its worst in 1QFY17. Month-end's launch of the new Mazda CX-5 coupled with MYR's recent strength against JPY will put BAuto back onto a growth trajectory. We raise FY18-20 earnings forecasts by 4%-10%, having tweaked (i) sales mix assumption for more high-margin models, (ii) our JPY100/MYR assumption for FY19/20 to 3.80 (from 3.90; FY18E: 3.90). We now peg BAuto back to its mean valuation of 14.5x CY18 PER (from 12.5x; -0.5 SD), deriving a new MYR2.45 TP (+26%). BAuto is now a BUY.
• Interesting model pipeline to fuel topline growth. In addition to the new CX-5, BAuto is also looking to bring in the Mazda CX-8 (a 7-seater SUV model, currently unrepresented by Mazda Malaysia) in 2018 to expand its market share in the SUV segment. Furthermore, Mazda's flagship Mazda3 model will be due for replacement in 2019 and will likely feature the new Skyactiv-X technology (higher horsepower and torque without sacrificing fuel efficiency). These models will likely recapture interests in the Mazda marque; we rejig our financial model to account for the change in sales mix over the next 3 years.
• Persistent strength in MYR to lift profit margins. Despite geopolitical tension once again testing the JPY as a safe haven currency, MYR is able to hold on to its recent strength, backed by strong economic data points. We view this positively as JPY/MYR forex rate is a key determinant for BAuto's gradual margin recovery. Despite our earnings revisions, we believe that there's still room for earnings upgrade as we have only expected net margins to recover to 9+% (FY16 level) in FY18; recall that BAuto's earnings peaked in FY15 at a net margin of 12%. Further upside could come from BAuto's reduced forex exposure as more models are localised in production. 
• Still the best ride in the sector. BAuto's earnings power has been resilient over the last 3 years; in fact, one of the best despite the overall sector weakness. With strong earnings growth outlook back in sight, we believe that BAuto is the best proxy of a gradual recovery in both TIV and MYR. BUY, backed by 5+% yields.

P/s: A new Initial-D car is in the making; SkyActiv-R RX-9! (https://paultan.org/2017/09/19/mazda-to-unveil-new-rotary-concept-at-tokyo-show/)

 

 

Auto Stats: MY Automotive (POSITIVE) – Slow, but steady

• August's MoM TIV growth driven by strong July TIP. Strong 36% MoM growth in July TIP translated to a 7% MoM rebound in Aug TIV to 51.7k units (-1% YoY), led by the non-national marques. The industry's fundamental continues to show improvement (i.e. TIV growth, higher auto loans approval, stronger MYR), albeit a gradual one, supporting auto stocks' earnings recovery. We remain POSITIVE on the sector with BUYs on BAuto, MBM and TCM (ranked in preference).  
• The start of a stronger half in 2H17. Aug's MoM volume sales growth was board-based (except for Perodua and Hyundai), led by the non-national marques – specifically the continental brands. Honda saw the largest absolute volume growth by 1.2k units MoM (+14% MoM, +18% YoY), possibly lifted by the launch of B-segment City Hybrid. Aug's TIV lifted 8M 2017's TIV to 384.7k (+4% YoY). We keep our 2017 TIV forecast of 610k units (+5% YoY) as we expect stronger sales in 4Q17, with the boost from highly anticipated new model launches (i.e. Mazda CX-5 & Perodua Myvi). Aug's sustained level of TIP (see overleaf) could see Sep's TIV persist above the 50k-unit level.
• Position ahead of a recovery. Most listed auto stocks have seen two to three years (2014-2016) of share price underperformance relative to the KLCI as the MYR weakness against USD and JPY affected auto earnings negatively. Despite (i) MYR's recent gain against USD and JPY and (ii) TIV's 4% YoY rebound in 8M17, most auto stocks continue to underperform (vs KLCI Index +8% YTD). We believe that the recent uptick in HP loan application and approval rates by the banks alongside the recovering MYR are opportunities to position head for a recovery in both TIV and earnings.