Company Update, 5 March 2014

Berjaya Auto(BAUTO MK)

Consumer Cyclical - Auto & Autoparts Market Cap: USD443m

Buy (Maintained)
Target Price: Price:
Macro Risks

MYR2.20 MYR1.80

More Zoom-Zoom Awaits

Berjaya Auto (BAUTO MK)

Price Close Relative to FTSE Bursa Malaysia KLCI Index (RHS)

2.1 1.9 1.7 1.5 1.3 1.1

0.9 0.7 0.5 80 70 60 50 40 30 20 10

332 301 270 238 207 176

145 113 82

2 . 2 0 Value . 3 0 0 . 2 0 0 We came out from our recent corporate luncheon with Berjaya Auto . 0 (BAUTO) feeling more positive on its prospects going forward. We 0 believe BAUTOs growth rate in the next few years will easily outstrip 0 that of its peers as well as the broader market, helped by its compelling product range and increased localisation. Maintain BUY, with a new TP of MYR2.20 (from MYR1.95), based on a FY15F 12.5x P/E. Growth Highlights from our recent corporate luncheon. RHBs recently-held luncheon (preceded by a presentation) for Berjaya Auto (BAUTO) was well attended by 14 fund managers. BAUTOs management, led by CEO Dato Sri Ben Yeoh and director Dato Francis Lee, provided insights into its: i) sales volume YTD, ii) strategy for the coming years, iii) preview of its new models to be launched, and iv) reaction to the recentlyannounced National Automotive Policy (NAP). The management also revealed that its new assembly facility within the Inokom plant is on schedule to be commissioned next month. Five new models in three years. The first of five new models in the next three years will be the all-new Mazda 2, which we expect to be launched by 4Q14. We believe the other new models will also include Csegment and D-segment models. Lifting our forecasts. We lift our FY14-16 earnings forecasts by 4.3%/8.7%/16% respectively, after factoring in: i) growth in sales volume from the expansion of its completely-knocked-down (CKD) operations, ii) five new models from now till 2016, and iii) an increase in production capacity as well as improved utilisation rates. We have also fined-tuned our margin assumptions in anticipation of increased CKD sales. Upgrading TP to MYR2.20. We peg our stock to a new 12.5x P/E (from 12x), broadly in line with peer target valuations and raise our target price to MYR2.20 (from MYR1.95). In our opinion, the higher P/E is justified considering the 3-year FY13-16 EPS CAGR of 49.5%. The implied target PE-G is only 0.25x. BAUTO currently trades at an undemanding FY15 P/E of 10.3x. Maintain BUY.
Forecasts and Valuations Total turnover (MYRm) Reported net profit (MYRm) Recurring net profit (MYRm) Recurring net profit growth (%) Recurring EPS (MYR) DPS (MYR) Apr-12 664 41 41 12.9 0.06 0.00 31.7 12.0 14.7 0.0 20.5 46.6 net cash Apr-13 1,064 52 52 26.1 0.07 0.00 25.1 8.2 24.4 0.0 14.3 38.7 net cash Apr-14F 1,448 109 109 110.4 0.13 0.03 13.4 5.1 18.9 1.9 8.2 49.0 net cash 4.1 Apr-15F 1,918 142 142 30.3 0.18 0.04 10.2 3.7 11.5 2.4 5.9 41.9 net cash 0.7 Apr-16F 2,297 171 171 20.6 0.21 0.05 8.5 2.8 10.1 2.9 4.6 37.5 net cash 6.2

Vol m

Nov-13

Dec-13

Dec-13

Feb-14

Source: Bloomberg

Avg Turnover (MYR/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (MYR) Free float (%) Shareholders (%) Berjaya Group Berhad Podium Success Sdn Bhd

2.99m/0.92m NA 22.0 0.70 - 1.93 25

Feb-14

Jan-14

67.6 7.1

Shariah compliant

Alexander Chia +603 9207 7621

alexander.chia@rhbgroup.com

Recurring P/E (x) P/B (x) P/CF (x) Dividend Yield (%) EV/EBITDA (x) Return on average equity (%) Net debt to equity (%) Our vs consensus EPS (%)

Source: Company data, Error! Bookmark not defined.

See important disclosures at the end of this report

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Berjaya Auto(BAUTO MK)

5 March 2014 Mazdas YTD sales volume. For 9MFY14, BAUTO recorded sales volume of 6,717 units in Malaysia and 1,591 units in the Philippines, which were in line with our estimates. Its CX-5 model continues to be the key driver of local sales volume, followed by Mazda 6, which was launched last year. In the Philippines, 1HFY14 sales largely comprised CX-5 and Mazda 3. The Mazda 6 has won Top Gear Philippines 2013 Car of the Year, which has helped to raise the profile of Mazda cars there. Figure 1: Malaysia - 9MFY14 vehicle sales by model
Units 3,500 3,000 2,500 2,000 150 1,500 1,000 500 0 100 50 0

Figure 2: Philippines - Mazdas 1HFY14 vehicle sales

Units 300 250 200

Source: Company, Malaysian Automotive Association (MAA)

Source: Company

New Mazda assembly facility to be commissioned by April. Management expects the new assembly facility located within the Inokom plant in Kulim to be fully commissioned by April this year according to schedule. A visit to the new plant last week confirmed that trial production has already begun. Although utilisation rates have yet to reach optimal levels due to labour constraints, we understand from the management that productivity has improved gradually and by end-2014, production rates should reach the level to enable the production of 20,000 units per annum. New Mazda 2 with SkyActiv technology to stir the local B-segment. We gather from the management that the first of the five new models to be introduced in the next three years is the all new Mazda 2 that could reach Malaysian market by end2014. We understand that the new Mazda 2 will be built in Thailand and come in two variants hatchback and sedan. Both will feature Mazdas award winning SkyActiv technologies. While Mazda has not officially stated that the Hazumi is in fact the new Mazda 2, it mentioned that the Hazumi concept would signpost the brands future subcompact cars from the design perspective. All in, we are confident that this sleek subcompact car will be well-received and should enable Mazda to reclaim market share in the B-segment in addition to rounding off its product range. Figure 3: Mazdas Hazumi concept

Source: Mazda Japan

See important disclosures at the end of this report

Berjaya Auto(BAUTO MK)

5 March 2014 EBIT margins to be sustainable going forward. BAUTO recorded strong 1HFY14 earnings growth helped by a higher 9.4% EBIT margin (1HFY13: 7.3%). We reaffirm our view that the EBIT margins will be sustainable in the upcoming years after factoring in: i) improved CKD operations margins due to higher localisation, ii) improved labour productivity, iii) updating our JPY/MYR assumptions, and iv) higher proportion of CKD sales. Figure 4: Upcoming local vehicle launches
Model Proton GSC Mazda 2 Honda City B-Segment Honda Jazz MINI F56 Hatch Ford Fiesta 1.0 EcoBoost Ford Fiesta ST Mazda 3 C-Segment Volkswagen Jetta Nissan Sylphy Renault Fluence EV Nissan Teana Toyota Camry Mazda 6 Ford EcoSport Mazda 5 Nissan Note Nissan Serena S-Hybrid Commercial Segment
Source: Companies

New model New Generation model New Generation model New Generation model New Generation model New Fiesta variant New Fiesta variant CKD model CKD model New Generation model New Fluence variant New Generation model CKD model CKD model New Generation model New Generation model New model New Serena variant, CKD model New Generation model, CKD model

D-Segment SUV Segment MPV Segment

Ford Transit

Investment risks. These include: i) unfavourable forex trends, ii) supply chain disruption, iii) slower economic growth affecting demand for vehicles, and iv) intensified competition that could crimp margins. Forecasts. We lift our earnings estimates for FY14-16 by 4.3%/8.7%/16% respectively, after adjusting our sales volume assumption and also tweaking the margins from the higher proportion of CKD vehicle sales volume for FY15 and FY16. Investment case. Considering BAUTOs robust 3-year FY13-16 EPS CAGR of 49.5%, we think the stock deserves to trade at a higher 12.5x (from 12x) target P/E, which remains broadly in line with peer target valuations. The implied target PE-G is only 0.25x. Accordingly, we derive a higher target price of MYR2.20 (from MYR1.95). BAUTO currently trades at an undemanding FY15 P/E of 10.3x. Maintain BUY.

Figure 5: Key assumptions

2013 Malaysia Sales volume (units) Average MYR/JPY
Source: Company, RHB estimates

2014F 9,796 2,221 3.20

2015F 12,819 3,442 3.25

2016F 15,214 4,406 3.27

8,142 657 3.69

The Philippines

See important disclosures at the end of this report

Berjaya Auto(BAUTO MK)

5 March 2014

Financial Exhibits
Profit & Loss (MYRm) Total turnover Cost of sales Gross profit Gen & admin expenses Selling expenses Operating profit Operating EBITDA Depreciation of fixed assets Operating EBIT Net income from investments Other recurring income Interest income Interest expense Pre-tax profit Taxation Minority interests Profit after tax & minorities Reported net profit Recurring net profit 1 0 (2) 55 (15) 41 41 41 Apr-12 664 (569) 95 (23) (15) 57 62 (5) 57 Apr-13 1,064 (925) 139 (39) (28) 72 79 (7) 72 (2) 3 1 (5) 70 (17) (1) 52 52 52 Apr-14F 1,448 (1,227) 221 (53) (28) 141 150 (9) 141 11 3 1 (5) 151 (38) (5) 109 109 109 Apr-15F 1,918 (1,642) 276 (61) (31) 184 197 (13) 184 16 3 1 (5) 199 (50) (8) 142 142 142 Apr-16F 2,297 (1,965) 332 (73) (36) 223 240 (17) 223 19 3 1 (5) 241 (60) (10) 171 171 171

Source: Company data, Error! Bookmark not defined.

Cash flow (MYRm) Operating profit Depreciation & amortisation Change in working capital Other operating cash flow Operating cash flow Interest received Interest paid Tax paid Cash flow from operations Capex Other investing cash flow Cash flow from investing activities Dividends paid Proceeds from issue of shares Increase in debt Other financing cash flow Cash flow from financing activities Cash at beginning of period Total cash generated Implied cash at end of period

Apr-12 57 5 46 1 109 0 (2) (18) 88 (3) 0 (2) (41) (2) (43) 34 43 77

Apr-13 72 7 (29) 27 78 1 (5) (21) 53 (14) (25) (39) 6 90 (5) 91 77 105 182

Apr-14F 141 9 (31) (1) 118 1 (5) (38) 77 (28) 1 (28) (27) 43 (75) (1) (60) 182 (11) 171

Apr-15F 184 13 (17) (1) 180 1 (5) (50) 126 (31) 1 (31) (35) (1) (36) 172 59 231

Apr-16F 223 17 (31) (1) 208 1 (5) (60) 144 (26) 1 (26) (43) (1) (43) 231 75 306

Source: Company data, Error! Bookmark not defined.

See important disclosures at the end of this report

Berjaya Auto(BAUTO MK)

5 March 2014

Financial Exhibits
Balance Sheet (MYRm) Total cash and equivalents Inventories Accounts receivable Other current assets Total current assets Total investments Tangible fixed assets Intangible assets Total other assets Total non-current assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Total long-term debt Other liabilities Total non-current liabilities Total liabilities Share capital Retained earnings reserve Other reserves Shareholders' equity Minority interests Other equity Total equity Total liabilities & equity 17 1 9 27 267 29 89 12 130 11 18 29 159 40 68 108 108 267 Apr-12 77 130 31 3 241 Apr-13 182 194 31 16 423 23 20 1 19 63 485 127 124 34 285 2 32 35 319 360 79 (280) 159 7 0 166 485 Apr-14F 172 278 40 10 499 34 40 1 19 93 592 54 175 34 263 32 32 295 403 162 (280) 285 12 297 592 Apr-15F 231 342 53 13 639 50 58 1 19 127 765 54 234 34 322 32 32 354 403 268 (280) 391 20 411 765 Apr-16F 307 409 63 16 794 69 67 1 19 156 950 54 280 34 368 32 32 400 403 397 (280) 520 30 550 950

Source: Company data, Error! Bookmark not defined.

Key Ratios (MYR) Revenue growth (%) Operating profit growth (%) Net profit growth (%) EPS growth (%) Bv per share growth (%) Operating margin (%) Net profit margin (%) Return on average assets (%) Return on average equity (%) Net debt to equity (%) DPS Recurrent cash flow per share

Apr-12 12.0 12.6 12.9 12.9 60.3 8.5 6.2 14.4 46.6 (34.9) 0.00 0.12

Apr-13 60.4 27.1 26.1 26.1 46.7 6.8 4.9 13.7 38.7 (31.9) 0.00 0.07

Apr-14F 36.1 95.6 110.4 88.0 60.0 9.7 7.5 20.2 49.0 (39.6) 0.03 0.10

Apr-15F 32.4 30.5 30.3 30.3 37.4 9.6 7.4 20.9 41.9 (43.1) 0.04 0.16

Apr-16F 19.8 21.1 20.6 20.6 32.8 9.7 7.4 19.9 37.5 (46.0) 0.05 0.18

Source: Company data, Error! Bookmark not defined.

See important disclosures at the end of this report

Berjaya Auto(BAUTO MK)

5 March 2014

SWOT Analysis
Strong and experienced management team Strong support from Berjaya Corporation Group of Companies Mazda is an established and internationallyacclaimed brand Regulatory changes affecting the competitive landscape of the local automotive sector

Strong growth opportunity in the Philippines automotive sector Introduction of five new models from this year till 2016

Stiff competition in the automotive sector with many recent and upcoming launches of new models

P/E (x) vs EPS growth

35 30 25 20 15 10 5 0 100% 86% 71% 57% 43% 29% 14% 0% 14 12 10 8 6 4 2 0

P/BV (x) vs ROAE

60% 51% 43% 34% 26% 17% 9% 0%

Jan-13

Jan-14

Jan-16

Jan-12

Jan-13

Jan-14

Jan-15

P/E (x) (lhs)

EPS growth (rhs)

P/B (x) (lhs)

Return on average equity (rhs)

Source: Company data, Error! Bookmark not defined.

Source: Company data, Error! Bookmark not defined.

Company Profile
Berjaya Auto Berhad is involved in the distribution, assembling, retailing and also the provision of after sales service of Mazda vehicles in Malaysia. The Group is also involved in the domestic distribution of locally assembled Mazda vehicles and the export of the locally assembled Mazda vehicles.

See important disclosures at the end of this report

Jan-16

Jan-12

Jan-15

Berjaya Auto(BAUTO MK)

5 March 2014

Recommendation Chart
Price Close
2.1 1.9 1.7
Recommendations & Target Price

NR

1.5 1.3 1.1

0.9 0.7 0.5
Buy Neutral Sell Trading Buy Take Prof it Not Rated

Nov-13

Dec-13

1.95

Jan-14

Feb-14

Source: Error! Bookmark not defined., Bloomberg

Date 2014-01-16 Recommendation Buy Target Price Price 1.95 1.81

Source: Error! Bookmark not defined., Bloomberg

See important disclosures at the end of this report

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