Berjaya Auto Berhad FV: RM 0.91 Vroom Vroom...I m Racing

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1 A Member of the TA Group MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: NEW LISTING Wednesday, October 30, 2013 FBM KLCI: 1, Sector: Automotive Berjaya Auto Berhad FV: RM 0.91 Vroom Vroom...I m Racing THIS REPORT IS STRICTLY FOR INTERNAL CIRCULATION ONLY* Main Market Listing NOT RATED Angeline Chin Swee Tyng ext:1641 angelinechin@ta.com.my CORPORATE PROFILE Berjaya Auto Berhad (BAB) is principally involved in the distribution and retailing of Mazda vehicle. It also provides after services for Mazda vehicles. Through its associate, Mazda Malaysia S/B (MMSB), the group is also involved in the local assembly of Mazda vehicles by 3 rd party contract assembler using local parts and imported Mazda supplied parts as well as domestic distribution of locally assembled Mazda vehicles through Bermaz and export of Mazda vehicles assembled in Malaysia. BAB is a subsidiary of Berjaya Corporation. BAB is 75.4% owned by Berjaya Group Berhad (BGroup) and 7.94% by Podium Success. Post the IPO, BGroup s stake will reduce to 67.63% while Podium Success will be 7.12%. STATISTICS OF THE IPO New Shares : 82.8mn Shares Offer for sale : None Enlarged issued and full paid up capital : 802.8mn shares Market Cap based on IPO listing: RM561.9mn INVESTMENT CASE Introduction of a wider range of Mazda CKD models and the export of the locally assembled CKD models. Expanding distribution network by penetrating into key markets in Malaysia and establishing new branches and appointing new dealers. Mazda s market share in the non national passenger vehicles segment has increased from 0.3% in 2008 to 3.8% for first nine months of We believe Mazda will continue to gain market share in the non national cars passenger vehicle segment as the brand gaining popularity among Malaysians and launches of attractive new models with energy efficient engines. For FY13 FY15, we expect the group s earnings to grow by a compounded annual growth rate (CAGR) of 19% to RM71.8mn. Revenue is projected to reach RM1.3bn and RM1.4bn in FY14 and FY 15, respectively. The growth in revenue will be driven by higher sales volume of Mazda cars and launches of new models. Share Information Listing Main Market Enlarged Share Capital (mn) Market RM0.76 (mn) Par Value (RM) 0.50 Issue Price 0.7 Oversubscription rate NA Estimated free float (%) NA Tentative Listing Date 18-Nov-13 Tentative Listing Dates Event Tentative Date Opening of the IPO 18-Oct-13 Closing of the IPO 1-Nov-13 Balloting of Applications 8-Nov-13 Allotment of Shares 14-Nov-13 Listing 18-Nov-13 Ratio & Analysis NTA per share (post IPO)(sen) 0.28 Price to NTA (x) 2.5 Proforma ROE (%) 23.9 Proforma ROA (%) 9.4 Proforma Net Gearing (x) Net Cash Proforma Current Ratio (x) 1.7 Utilisation of Proceeds RMmn % Working Capital Capex Investment in MMSB Estimated Listing Expens TOTAL VALUATION Based on its IPO price of RM0.70, BAB will trade at 9.1x FY14 PER and 7.8x FY15 PER. We fairly value BAB at RM0.91, using CY14 EPS of 8.1sen and PER of 11.2x. The PER of 11x represents a 10% discount to its local peers average PER of 12.4x. We believe the discount is justifiable due to its relatively small market capitalisation and industry market share in the non national cars segment. Our fair value offers a total potential of upside of 34.0% (capital upside: 29.6%, dividend yield: 4.4%). Page 1 of 11

2 CORPORATE PROFILE Berjaya Auto Berhad (BAB) is principally involved in the distribution and retailing of Mazda vehicle. It also provides after services for Mazda vehicles. Through its associate, Mazda Malaysia S/B (MMSB), the group is also involved in, 1) local assembly of Mazda vehicles by 3 rd party contract assembler via combination of local and imported parts, 2) domestic distribution of locally assembled Mazda vehicles through Bermaz, and 3) export of Mazda vehicles assembled in Malaysia. BAB distributes Mazda vehicles through its own branches and 3 rd party dealers in Malaysia as well as through 3 rd party dealers in the Philippines. It currently has 4 branches in Malaysia (all 3S centres) and also appointed 68 dealers nationwide. BAB is 75.4% owned by Berjaya Group Berhad (BGroup) and 7.94% by Podium Success. Post the IPO, BGroup s stake will reduce to 67.63% while Podium Success will be 7.12%. CORPORATE STRUCTURE The figure below illustrates the group s corporate structure: Figure 1 : Corporate Structure Berjaya Auto Bermaz (100%) BMTSB (100%) BMIL (100%) MMSB (30%) BAP (60%) Page 2 of 11

3 Figure 2 : Key achievements and milestones 28 Feb 2008 Awarded distribution rights for Mazda CBU vehicles in Malaysia by Mazda Japan. 1 Apr 2008 Completed the acquisition of Hercules Automotive Engineers Sdn Bhd (now known as BMTSB) from CCB. 1 Apr 2010 Awarded distribution rights from Mazda Japan to locally assemble and distribute Mazda3 CKD vehicles in Malaysia. 29 Apr 2010 Obtained assembly approval from the MITI to carry out CKD assembly for the Mazda3 CKD vehicles at Inokom's manufacturing facility. 18 Jan 2011 Rolled out the first Mazda3 CKD vehicle at Inokom's plant. 2 Mar 2011 Nationwide launch of Mazda3 CKD vehicles for the Malaysian market. 31 Mar 2011 Extended the Malaysia CBU Agreement with Mazda Japan for the supply of Mazda CBU vehicles, spare parts, accessories and tools for distribution in Malaysia for a period of 3 years up to 31 March May 2012 Launched the Mazda CX-5 model, the first Mazda model equipped with the "Skyactiv Technology". 7 Sep 2012 Obtained assembly approval from the MITI to carry out CKD assembly for the Mazda CX-5 CKD vehicles at Inokom's manufacturing facility. 11 Sep 2012 Entered into a joint venture agreement with Mazda Japan to collaborate for the assembly and supply of CKD vehicles of Mazda in Malaysia. 12 Sep 2012 Entered into the Philippines CBU Agreement with Mazda Japan for the supply of Mazda CBU vehicles, spare parts, accessories and tools to BAP for distribution in the Philippines for a period of 3 years up to 30 September June 2013 Nationwide launch of Mazda CX-5 CKD vehicle for the Malaysia market. Figure 3 : Business Processes Mazda CBU vehicles Stock Ordering Mazda CKD vehicles Stock Ordering Stock Delivery Stock Delivery Storage Pre delivery inspection (QC) Process Dealer s Order and Payment Release Vehicle Vehicle Delivery Page 3 of 11

4 BUSINESS DESCRIPTION BAB distributes 10 Mazda vehicle models with a total of 24 variants to suit different market segments. Save for the Mazda CKD (completely knockeddown) vehicles which are locally assembled, all the other Mazda models are CBU (completely built up) units which are imported from Mazda Japan's manufacturing plants located in Japan and Thailand via Prima Merdu. All Mazda models distributed in the Philippine are CBU units imported directly by Berjaya Auto Philippines Inc (BAP). The assembly of CKD vehicles of Mazda in Malaysia is undertaken by Inokom as a contract assembler at its plant in Kulim, Kedah. The rollout of the first Mazda3 CKD vehicle was successfully undertaken on 18 Jan 2011 while the approval of the MITI for the contract assembly of Mazda CX 5 CKD vehicles was obtained on 7 Sep Malaysia remains the core market for the group, accounting 93% of FY13 revenue while Philippines contributed 7%. Sale of CBU vehicles accounting for about 77% of its total revenue, followed by sale of CKD (20%), sale of spare parts (3%) and maintenance and fitting of motor vehicle accessories (1%). Figure 4 : Sales volume by models (units) FY10 FY11 FY12 FY13 Malaysia Mazda ,805 2,079 1,317 Mazda , Mazda 3 (CKD) ,009 2,166 Mazda Mazda Mazda CX ,553 CX CX MX RX BT Total 2,113 4,826 5,909 8,142 Philippines Mazda Mazda CX CX BT Total FUTURE PLANS Expand the range of CKD vehicles of Mazda and increase utilisation of local contents BAB will introduce a wider range of Mazda CKD models and the export of the locally assembled CKD models. Besides exporting Mazda CX 5 CKD vehicles to Thailand, the group is looking to identify other potential export markets in order to increase the export of locally assembled Mazda vehicles to neighbouring countries. Page 4 of 11

5 Expand distribution network and dealership The group currently has 4 distribution branches and 68 dealers throughout Malaysia. The group plans to expand its distribution network by penetrating into key markets in Malaysia and establishing new branches and appointing new dealers in the Northern and Southern region of Malaysia. We gathered that the group plans to establish three new 3S (sales, spare parts and after sales service) centres in Malaysia within the next two years. Figure 5 : Current dealers in Malaysia Central Northern Southern Eastern Sabah & Sarawak Total FUTURE OUTLOOK AND PROSPECTS Malaysia s automotive industry is dominated by the passenger vehicles segment (88%) of the total industry volume (TIV) in 2012, while the rest are from commercial vehicles. The TIV for new passenger in the first nine months of 2013 was 430,488 units compared to 403,916 units in 2012 (+6.6% YoY). Under the Barisan Nasional s manifesto, the government will revamp the Nasional Automotive Policy (NAP) and gradually reduce car prices by 20 30% over a five year period. We believe this may lead to greater demand for cars in the future. On the other hand, in Budget 2014, government announced that Malaysia will implement the goods and services tax (GST) at 6% wef April 1, 2015 (vs. 10% sales tax presently). This means, theoretically, new motor vehicle purchasers will be able to enjoy a 4% reduction in tax. While we are positive on this measure, we think 4 p.p. reduction in tax will not have significant impact on passenger vehicles price. Hence, this should not cause a significant delay in the replacement cycle or new purchases of vehicles. In Malaysia, Mazda vehicles compete in the B (small cars), C (medium cars), D (large cars), MPV (multi purpose vehicle) and the SUV (sports utility vehicle) segments within the non national passenger vehicles segment. Its market share in the non national passenger vehicles segment has increased from 0.3% in 2008 to 2.7% in The market share has further increased to 3.8% for first nine months of 2013 to 6,669 units (+55.8% YoY). We believe Mazda will continue to gain market share in the non national cars passenger vehicle segment as the brand gaining popularity among Malaysians. Furthermore, its best selling model, CX 5 is entering in the popular and highly competitive compact crossover segment and will continue to rev up Mazda s sales. Page 5 of 11

6 Figure 6 : Mazda market share is trending up ifigure 7 : Mazda market share is about 4% as at 9M % Toyota Honda Nissan Hyundai VW Mazda 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% M2013 Mazda 4% VW 4% Hyundai 5% Others 23% Nissan 19% Toyota 24% Honda 21% Source: MAA, TA Securities Source: MAA, TA Securities Figure 8 : Mazda passenger vehicle volume sales in Malaysia Unit 8,000 Sales (LHS) YoY Growth (RHS) 250% 7,000 6, % 5,000 4,000 3, % 100% 2,000 1,000 50% 0 0% M2013 Source: MAA, TA Securities FINANCIAL HIGHLIGHTS Mazda have recorded steady growth trend in sales volume from 2010 to 2012 (CAGR of 57%). The group s net profit increased by 25% to RM50.9mn on the back of 60.4% surge in revenue. The commendable revenue was mainly due to higher sales volume (+49% YoY to 8,799 units), especially from Mazda CX 5 and BT 50 models. Note that Mazda CX 5 model was launched in April 2012 in Malaysia and had received good response since then (2,553 unit or 31.3% of total sales volume in Malaysia). The sales volume of BT 50 model also increased from 140 units in FY12 to 640 units in FY13. The group is in a net cash position with cash pile of RM192.5mn as at 31 Apr For FY13 FY15 we expect the group s earnings to grow by a compounded annual growth rate (CAGR) of 19% to RM71.8mn. Revenue is projected to reach RM1.3bn and RM1.4bn in FY14 and FY15, respectively. The growth in revenue will be driven by higher sales volume of Mazda cars and launches of new models. Page 6 of 11

7 Figure 9 : Revenue vs. Net profit (RMmn) 1,600 Revenue (LHS) Net Profit (RHS) 80 1, , , FY10 FY11 FY12 FY13 FY14F FY15F 0 Figure 10 : Sales volume break-down by countries 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 - Malaysia Philippines 8,142 5,909 4,826 2, FY10 FY11 FY12 FY13 DIVIDEND POLICY Management has committed to pay out 40% of net profit as dividends. As such, we expect the DPS payout for FY14 and FY15 to be at 3.1sen, 3.6sen, respectively. This translates into dividend yield of 4.4% and 5.1% for FY14 and FY15. RISKS Fluctuation in currency The fluctuation of foreign exchange rates, particularly the Japanese Yen (JPY) against Malaysia Ringgit (MYR) and Philippine Peso (Peso) will pose challenge to BAB s net profit as imported kits are purchased in Yen. Thus, appreciation of Yen can have a substantial impact on the group s margin. Management guided that a 5% strengthen in JPY/MYR will increase FY13 profit by 1.2%, and vice versa. Page 7 of 11

8 Figure 11 : Malaysian Ringgit (MYR) to 100 Japanese Yen (JPY) Jan-10 1-Jan-11 1-Jan-12 1-Jan-13 Source: Bloomberg, TA Securities Interest rate hike and credit tightening Interest rate hike will have a significant impact on the automotive industry as it will adversely affect buyers affordability which will lead to sluggish sales demand. Besides, macro prudential lending measures implemented or to be implemented by Bank Negara Malaysia (BNM) such as credit evaluation using net pay, lowering of loan tenure etc would also negatively affect auto sales. Supply chain disruption risk Supply chain disruption due to natural catastrophes will have a huge impact to Mazda Japan, particular in term of the production of and supply of Mazda CBU vehicles, CKD parts, spare parts, accessories and tools. This will directly affect BAB s automotive business. Increase in cost of living Any increase in cost of living due to inflation (higher fuel prices, GST implementation, subsidy rationalisation etc.) will lower the disposable income of potential car buyers. This will affect the demand for new vehicles. VALUATION Based on its IPO price of RM0.70, BAB will trade at 9.1x FY14 PER and 7.8x FY15 PER. Here, we fairly value BAB at RM0.91, using CY14 EPS of 8.1sen and PER of 11.2x. The PER of 11x represents a 10% discount to its local peers average PER of 12.4x. We believe the discount is justifiable due to its relatively small market capitalisation and industry market share in the non national cars segment. Our fair value offers a total potential of upside of 34.0% (capital upside: 29.6%, dividend yield: 4.4%). Page 8 of 11

9 Figure 12: Peers Comparison Company Call Local Currenc Price (LC) TP (LC) Mkt Cap (USD mn) PER (X) P/B (x) Dividend Yield ROE (%) CY13 CY14 CY13 CY14 CY13 CY14 CY13 CY14 Malaysia Berjaya Auto NR RM UMW Holdings BUY RM , Tan Chong Motors NR RM 6.42 NR 1, DRB-Hicom NR RM 2.45 NR 1, MBM Resources Hold RM Weighted Average PER (x) 8, China/Hong Kong SAIC Motor Corporation NR RMB NR 25, Great Wall Motor Co Ltd NR HKD NR 20, Dongfeng Motor Group NR HKD NR 12, WeiChai Power NR HKD NR 6, Brilliance China Automotive Holdings NR HKD NR 8, Guangzhou Automobile Group NR HKD 8.82 NR 7, Zhongsheng Group NR HKD NR 3, Baoxin Auto Group NR HKD 7.79 NR 2, Sinotruck HK NR HKD 3.90 NR 1, Weighted Average PER (x) 87, Indonesia Astra International NR IDR 6, NR 24, Indomobil Sukses Int'l NR IDR 5, NR 1, Weighted Average PER (x) 26, Source: Bloomberg, TA Securities Earnings Summary (RMmn) FYE April 30 FY10 FY11 FY12 FY13 FY14F FY15F Revenue , , ,404.0 EBITDA PBT Tax (5.8) (12.7) (14.5) (17.2) (20.9) (24.3) Net Profit EPS (sen) DPS (sen) Net Dividend Yield (%) PER (X) Sales Growth (%) EPS Growth (%) EBITDA Margin (%) PBT Margin (%) Net Margin (%) Page 9 of 11

10 Appendix II What is a CKD and what is a CBU? CBU Completely Built Unit Completely built unit refers to a car/bike/automobile that is imported from another country as a fully assembled unit. These automobiles do not require an assembly before they can be sold out to the buyers in the target country s markets. CKD Completely Knocked Down Completely knocked down car / bike /automobile is one which is imported or exported in parts and not as one assembled unit. Such units are first sent to an assembly plant in the target country where all these parts are assembled and one complete car / bike / vehicle is made using the imported components. These kinds of units generate employment in the target country as more machinery and manpower investment is needed to assemble the components to make the vehicle. National Automotive Policy (NAP) Framework The policy was formed on 19 October 2005 by the Prime Minister s Department. Objectives The policy is formed on the basis of the following 5 major objectives: To promote a competitive and viable automotive sector, in particular national car manufacturers. To become a regional hub for manufacturing, assembly and distribution for automotive vehicles. To enhance value added and local capabilities in the automotive sector. To promote export-oriented Malaysian manufacturers as well as component and parts vendors. To promote competitive and broad-based Bumiputera participation in vehicle manufacturing, distribution and importation as well as in component and parts manufacturing. NAP 2006 Highlights Local assembly of luxury passenger above 1,800cc and priced above RM150,000 on-the-road fully liberalised. Foreigners can own 100% of assembly operations. APs to be stopped by Dec Audit on AP recipients on-going and checks to be done. Those flouting rules will be removed from list. Gradual introduction of Vehicle End of Life Policy. For starters, vehicles above 15 years will have to undergo mandatory inspection during renewal of road tax. Import Duty structure maintained at 0% for CKD and 5% for CBU for AFTA. Excise duty structure remains. No changes. All imported used vehicles prices will be gazetted to prevent underdeclaration. Manufacturing of critical components for cars such as brake system and transmission to get tax incentives such as Pioneer Status/Investment Tax Allowance. The import of used parts/components will be prohibited from June Page 10 of 11

11 Proton to establish strategic partnership with a global OEM. The current policy on the freeze of manufacturing licence for reconditioning and reassembling (rebuilt) activities is maintained. NAP Review 2009 Highlights Objectives from NAP 2006 were maintained but the following factors became the main focus of the review: Bring in more sophisticated latest technology into the domestic auto industry Draw up competitive safety standards and environmental-friendly opportunities Enhance implementation of the NAP plans The following are the highlights of the review: All duties and taxes on CKD and CBU vehicles remain unchanged. Franchise AP system to be terminated by 31 Dec Open AP system to be terminated by 31 Dec RM 10,000 will be collected for each Open AP, starting 1 Jan AP holders will be audited twice a year. The Customs will maintain an official price list for used CBU vehicles to prevent under-declaration of the prices of parallel imported vehicles. Import of used vehicles will not be allowed after Import of used automotive parts to be banned from June Incentives will be provided to encourage the development of local automotive parts. Mandatory annual comprehensive inspection for vehicles aged 15 years or more before road tax renewal. A detailed plan will be introduced further down the road to scrap old vehicles; vintage vehicles will be exempted. Proton to form a strategic partnership with an established Original Equipment Manufacturer (OEM). Manufacturing Licence (ML) can now be issued for selected vehicle types such as luxury vehicles, hybrid and electric vehicles, trucks and commercial vehicles. No equity condition will be imposed in return for the ML. Incentives, in the form of tax breaks, duties exemption and grants, will be offered to local assemblers and manufacturers of hybrid and electric vehicles. Disclaimer The information in this report has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This report is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this document. We, our associates, directors, employees may have an interest in the securities and/or companies mentioned herein. for TA SECURITIES HOLDINGS BERHAD (14948-M) MENARA TA ONE, 22 JALAN P. RAMLEE, KUALA LUMPUR, MALAYSIA TEL: / FAX: (A Participating Organisation of Bursa Malaysia Securities Berhad) Kaladher Govindan Head of Research Page 11 of 11