21 November 2016 Corporate Update Bermaz Auto Implications of Mazda s supply chain transplant INVESTMENT THESIS APM-Delta JV reflects Mazda s move to transplant its supply chain and transform its Malaysian base into an export hub Increased localisation structurally reduces duty cost and underpins our thesis of export-led growth Higher localisation and higher CKD mix also reduces BAuto s forex exposure while JPY-denominated exports provide a natural hedge against currency risk Re-affirm high conviction BUY at unchanged TP of RM2.70/share. Significant value emerging after a 10% fall in share price post-market sell down. Ex-cash, BAuto trades at just 9x CY17F EPS. Supply chain transplant. APM Automotive (NOT RATED), one of the largest local parts maker recently announced that it is entering into a JV with Japanese parts maker, Delta Kogyo Ltd, for the development and production of Mazda seating components. A production plant (to be ready by Feb 2017) with a built-up area of 12,856sqm will be erected in Kulim, 5mins from Inokom where Mazda s CKD operations are located. Not the first vendor JV. APM-Delta is not the first JV between a local part-maker with Mazda s Japanese vendor. Recall in Dec 2015, Y-Tec Corp, Mazda s Japanese chassis manufacturer also formed a JV with EP Manufacturing Bhd (a local undercarriage manufacturer) to supply chassis parts to Mazda s Malaysian production. On top of this, Hirotec Corporation, a supplier of exhausts for Mazda s plant in Hiroshima has also expressed interest to setup operations in Malaysia. How does BAuto benefit? Excise duties account for an estimated 30%-35% of a car manufacturer s cost and is usually the 2 nd largest cost component after the cost of CKD kits and CBUs. However, excise duty is only charged on imported components and therefore duty cost reduces as localisation rate increases. Mazda s effort to bring over component suppliers to produce parts locally will translate into higher localisation rates (vs. the current 40%) and therefore helps to structurally reduce duty costs. Maintain BUY Unchanged Target Price (TP):RM2.70 RETURN STATS Price (18 Nov 2016) Target Price Expected Share Price Return RM2.11 RM2.70 +27.9% Expected Dividend Yield +7.0% Expected Total Return +34.9% STOCK INFO KLCI 1623.80 Bursa / Bloomberg Board / Sector Syariah Compliant 5248 / BAUTO MK Main/Automotive Yes Issued shares (mil) 1,145.53 Par Value (RM) 1.00 Market cap. (RM m) 2,417.06 Price over NA 5.29 52-wk price Range RM1.78 - RM2.44 Beta (against KLCI) 0.98 3-mth Avg Daily Vol 1.91m 3-mth Avg Daily Value RM2.14m Reduces cost and forex exposure. Every 1% increase in localisation rate will improve FY18F earnings by 1.5%. While the manufacturing of Mazda CKD models is done via 30%-owned Mazda Malaysia Sdn Bhd (MMSB), these cost savings are shared with BAuto in the form of cheaper CKD selling price to the latter. Increased localisation also reduces the group s exposure to forex risk as it reduces reliance on imported components. Major Shareholders (%) BERJAYA CORP 15.6% DYNAMIC MILESTONE 15.2% EPF 11.0% MIDF RESEARCH is a unit of MIDF AMANAH INVESTMENT BANK Kindly refer to the last page of this publication for important disclosures
INVESTMENT STATISTICS FYE Apr FY14 FY15 FY16 FY17F FY18F Revenue (RM m) 1,450.8 1,829.9 2,112.2 2,430.4 2,578.1 EBIT (RM'm) 166.6 285.6 262.1 263.1 304.5 Pre-tax Profit (RM m) 179.8 300.9 278.7 278.2 337.0 Core net profit (RM'm) 130.6 215.4 202.1 200.0 243.7 FD EPS (sen) 11.3 18.6 17.5 17.3 21.1 EPS growth (%) 84.2 64.9 (10.9) (1.0) 21.8 PER (x) 18.7 11.3 12.1 12.2 10.0 Net Dividend (sen) 2.8 14.6 16.9 14.7 17.9 Net Dividend Yield (%) 1.3 6.9 8.0 7.0 8.5 EXHIBIT 1: BAUTO EARNINGS & TARGET PRICE SENSITIVITY TO CHANGES IN LOCALISATION RATE Base case Localisation rate 40% 41% 42% 43% 44% 45% CY17F net profit (RMm) 229.2 232.1 235.0 237.9 240.8 243.7 Target Price (RM/share) 2.70 2.73 2.77 2.80 2.83 2.86 JPY-denominated exports provides a natural currency hedge. The move to increase localisation comes in tandem with the expansion of MMSB s export market (versus just Thailand currently) by year end (See our BAuto report dated 1 st Nov 2016) and should help MMSB lower its cost for exported models. Around half of the expected 22,000/annum production post-expansion will go towards exports and more importantly, these exports will be 100% denominated in JPY, which will provide a natural hedge against MMSB s JPY cost exposure which accounts for an estimated 30%-35% of total cost. Meanwhile, the expected doubling in production by MMSB from this expansion (from ~9,000 units in FY16) will drive scale for its vendors and in turn, lower unit cost of parts supplied. EXHIBIT 2: PROSPECTIVE MARKET TO ALMOST TRIPLE WITH EXPORT EXPANSION Population (m) Current vehicle fleet (m) Vehicle Penetration Annual TIV (m) Income/capita (USD) Iran 78.0 7.0 9.0% 1.222 17,300 Indonesia 261.4 20.9 8.0% 1.013 11,035 Thailand (current export market) 67.0 15.6 23.3% 0.800 16,305 Cambodia 15.1 0.4 2.8% 0.006 3,483 Laos 6.8 0.4 5.8% 0.015 5,675 Myanmar 53.3 0.4 0.7% 0.002 1,244 Malaysia 28.0 14.4 51.3% 0.667 26,891 Singapore 5.4 0.8 15.3% 0.079 85,208 Philippines 98.4 3.5 3.6% 0.289 7,359 Prospective Market (Post- 4.1 Expansion) Prospective Market (Pre- Expansion) 1.5 * MMSB s current production caters only for Malaysia and Thailand markets i.e. pre-expansion markets 2
Pushing for higher CKD mix. Other than deeper localisation and higher exports, management has taken a proactive effort to minimise BAuto s direct JPY exposure by focusing more on CKD model sales (and reducing CBU exposure, in particular, the lower margin Mazda 2 model). This is because CKD models are purchased by BAuto at a fixed Ringgit denominated price from MMSB, which absorbs forex volatility for CKD kit imports. Currently only the CX5 and Mazda 3 are locally assembled these models accounted for ~55% of Mazda TIV last year but had since increased to 70% in the most recent quarter. Largest exporter in Malaysia. In times of slow domestic growth, BAuto is one of the few Malaysian auto companies that provides exposure to higher growth regional auto markets, underpinned by the expansion of export markets to the whole of South East Asia (ex-vietnam) and Iran, a hub for the Middle East market, by year end. With an expected 10,000-12,000units per annum exports, the group is positioned as the largest exporter out of Malaysia. We re-affirm our high conviction BUY on BAuto at unchanged SOP-derived TP of RM2.70/share. This development underpins our thesis of export-led growth in the near-term, while significant value has emerged after a 10% fall in share price since the market sell down post-us elections. Ex-cash, BAuto now trades at just 9x CY17F earnings. The JPY has remained largely unchanged at around RM4.00 and it was mainly the USD (which BAuto has no exposure to) that strengthened against the Ringgit in the past week. Key share price catalysts over the next 12 months: (1) Attractive dividend yield of 7% underpinned by net cash which accounts for 12% of market cap and solid 10% FCFE yield (FY17F). Listing of Philippines unit will bump yields up further given potential one-off special dividends (See BAuto report dated 1 st Nov 2016). (2) Value unlocking from the listing of BAuto Philippines (BAP). Current market cap attributes practically no value to BAuto s stake in BAP relative to the 16x indicative IPO valuation and historical sector valuation of 12x (for Malaysian autos). Ex-cash, BAuto trades at just 9x CY17F earnings. (3) A more than doubling in associate earnings contribution to group (via 30%-owned Mazda Malaysia SB and 29%-owned Inokom) given a massive export market expansion which will triple MMSB s prospective market. EXHIBIT 3: BAUTO S 60% STAKE IN BAP IS ESSENTIALLY FREE AT CURRENT MARKET CAP! BAuto current market cap (RMm) 2,325 Value of domestic operations @ 13x CY17F PE (RMm) 2,675 Implied value of BAuto s 60% stake in BAP (RMm) (349.9) BAP contribution to BAuto net profit (CY17F) (RMm) 23.4 Implied PE valuation of BAP at current market cap (x) (15.0) BAP IPO PER valuation (x) 16 EXHIBIT 4: BAUTO SUM-OF-PARTS VALUATION CY17F net profit (RMm) PE (x) Value (RMm) Malaysia-based operations 206 13 2,675 Philippines-based operations 23 18 421 Total value 3,096 Shares out (m) - fully diluted 1,157 Value/share (RM) 2.70 3
Income Statement (FYE Apr) FY14 FY15 FY16 FY17F FY18F Revenue 1,450.8 1,829.9 2,112.2 2,430.4 2,578.1 Operating expenses (1,284.2) (1,544.3) (1,850.2) (2,167.3) (2,273.6) EBIT 166.6 285.6 262.1 263.1 304.5 Net interest expense 2.3 6.2 5.2 (0.2) (0.2) Associates 10.9 9.1 11.4 15.3 32.7 PBT 179.8 300.9 278.7 278.2 337.0 Taxation (45.9) (78.4) (68.0) (65.7) (76.1) Minority Interest (3.2) (7.1) (12.7) (12.4) (17.2) Net profit 130.6 215.4 198.0 200.0 243.7 Core net profit 130.6 215.4 202.1 200.0 243.7 Consensus net profit 130.6 215.4 198.1 217.0 241.8 Balance Sheet (FYE Apr) FY14 FY15 FY16 FY17F FY18F Non-current assets 86.1 130.8 163.5 156.0 191.7 PPE 19.8 37.5 43.0 47.1 50.2 Investments in associate 39.8 61.4 74.5 89.8 122.5 Others 26.5 31.9 46.0 19.1 19.1 Current assets 528.1 601.2 788.6 778.2 807.7 Inventories 263.8 215.6 310.2 364.6 335.1 Receivables 42.8 59.3 64.6 71.7 76.1 Others 36.8 45.4 42.2 15.6 15.6 Cash & equivalent 184.7 280.8 371.6 326.3 380.8 TOTAL ASSETS 614.2 732.0 952.1 934.2 999.4 Share capital 403.6 406.8 403.6 403.6 403.6 Minority Interest 10.5 18.9 32.3 44.7 61.8 Reserves (59.7) 69.9 127.5 175.6 212.2 TOTAL EQUITY 354.4 495.6 563.4 623.9 677.6 Non-current liabilities 64.9 60.5 82.5 34.7 34.7 Long-term borrowings 2.4 2.4-2.4 2.4 Deferred tax liabilities - - - - - Others 62.4 58.1 82.5 32.2 32.2 Current liabilities 194.9 175.9 306.3 275.6 287.1 Short-term borrowings 46.6 6.6-6.6 6.6 Payables 113.2 157.0 241.0 189.9 201.4 Others 35.2 12.3 65.3 79.2 79.2 TOTAL LIABILITIES 259.8 236.4 388.8 310.3 321.8 4
Cash Flow Statement (FYE Apr) FY14 FY15 FY16 FY17F FY18F Operating activities PBT 179.8 300.9 267.5 278.2 337.0 Depreciation & Amortization (5.5) (6.4) (10.7) (10.7) (10.4) Chgs in working capital (51.3) (74.8) (24.2) 45.9 36.6 Interest expense (2.3) (6.2) 0.2 0.2 0.2 Tax paid - - - - - Others (35.6) 8.6 11.5 (54.6) (81.6) CF from Operations 85.0 222.1 244.4 259.0 281.7 Investing activities Capex (5.5) (44.7) (13.9) (20.0) (20.0) Others 11.3 6.5 5.3 - - CF from Investments 5.7 (38.3) (8.5) (20.0) (20.0) Financing activities Dividends paid (32.1) (98.1) (147.2) (170.0) (207.2) Net proceeds in borrowings (80.0) - - - - Others 25.6 4.5 2.2 - - CF from Financing (86.5) (93.6) (145.1) (170.0) (207.2) Net changes in cash 4.2 90.3 90.7 69.0 54.6 Beginning cash 182.0 186.2 280.8 371.6 440.5 Overdrafts & Deposits (0.1) 4.4 - - - Ending cash 186.2 280.8 371.6 440.5 495.1 Ratios (FYE Apr) FY14 FY15 FY16F FY17F FY18F Revenue growth 36.3% 26.1% 19.7% 10.9% 6.1% EBITDA growth 110.6% 69.7% -9.2% 3.2% 15.0% Net profit growth 156.4% 64.9% -10.9% 4.3% 21.8% EBITDA margin 11.9% 16.0% 12.1% 11.3% 12.2% PATAMI margin 9.0% 11.8% 8.8% 8.2% 9.5% ROE 46.9% 52.5% 37.4% 35.5% 40.8% Operating ROA 28.8% 42.4% 31.7% 29.1% 31.5% Net gearing (%) Net cash Net cash Net cash Net cash Net cash Book value/share (RM) 0.30 0.41 0.47 0.50 0.53 PBV (x) 7.1 5.1 4.4 4.2 4.0 EV/EBITDA (x) 9.4 5.1 5.7 5.2 4.4 FCF yield (%) 3.7 7.5 9.7 9.8 10.7 5
DAILY PRICE CHART Hafriz Hezry hafriz.hezry@midf.com.my 03-2173 8392 Source: Bloomberg, MIDFR 6
MIDF RESEARCH is part of MIDF Amanah Investment Bank Berhad (23878 - X). (Bank Pelaburan) (A Participating Organisation of Bursa Malaysia Securities Berhad) DISCLOSURES AND DISCLAIMER This report has been prepared by MIDF AMANAH INVESTMENT BANK BERHAD (23878-X). It is for distribution only under such circumstances as may be permitted by applicable law. Readers should be fully aware that this report is for information purposes only. The opinions contained in this report are based on information obtained or derived from sources that we believe are reliable. MIDF AMANAH INVESTMENT BANK BERHAD makes no representation or warranty, expressed or implied, as to the accuracy, completeness or reliability of the information contained therein and it should not be relied upon as such. This report is not, and should not be construed as, an offer to buy or sell any securities or other financial instruments. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. All opinions and estimates are subject to change without notice. The research analysts will initiate, update and cease coverage solely at the discretion of MIDF AMANAH INVESTMENT BANK BERHAD. The directors, employees and representatives of MIDF AMANAH INVESTMENT BANK BERHAD may have interest in any of the securities mentioned and may benefit from the information herein. Members of the MIDF Group and their affiliates may provide services to any company and affiliates of such companies whose securities are mentioned herein This document may not be reproduced, distributed or published in any form or for any purpose. MIDF AMANAH INVESTMENT BANK : GUIDE TO RECOMMENDATIONS STOCK RECOMMENDATIONS BUY TRADING BUY NEUTRAL SELL TRADING SELL Total return is expected to be >15% over the next 12 months. Stock price is expected to rise by >15% within 3-months after a Trading Buy rating has been assigned due to positive newsflow. Total return is expected to be between -15% and +15% over the next 12 months. Total return is expected to be <-15% over the next 12 months. Stock price is expected to fall by >15% within 3-months after a Trading Sell rating has been assigned due to negative newsflow. SECTOR RECOMMENDATIONS POSITIVE NEUTRAL NEGATIVE The sector is expected to outperform the overall market over the next 12 months. The sector is to perform in line with the overall market over the next 12 months. The sector is expected to underperform the overall market over the next 12 months. 7