AUTOMOBILE ASSEMBLY & DISTRIBUTION

BERJAYA AUTO BHD

(BAAUTO MK)

4 April 2014

Rising scope for upside, EEV incentives kicking in

Company report
AmResearch Sdn Bhd www.amesecurities.com.my +603 2036 2280
Price Fair Value 52-week High/Low Key Changes Fair value EPS YE to Apr Revenue (RMmil) Core net profit (RMmil) EPS (Sen) EPS growth (%) Consensus EPS (Sen) DPS (Sen) PE (x) EV/EBITDA (x) Div yield (%) ROE (%) Net Gearing (%) Stock and Financial Data Shares Outstanding (million) Market Cap (RMmil) Book value (RM/share) P/BV (x) ROE (%) Net Gearing (%) Major Shareholders 802.8 1,645.7 0.26 7.7 47.9 n/a Berjaya Group (67.6%) Podium Success (7.1%) 25.0 1.8 3mth 6mth 12mth FY13 1,064.4 50.9 6.3 n/a n/a 0.0 32.3 18.6 0.0 47.9 n/a FY14F 1,464.2 127.4 15.9 150.1 13.1 4.0 12.9 8.5 2.0 49.0 n/a FY15F 1,851.2 155.5 19.4 22.1 16.1 4.8 10.6 7.1 2.4 42.5 n/a FY16F 2,007.2 196.1 24.4 26.1 18.8 6.1 8.4 5.2 3.0 39.4 n/a RM2.05 RM3.00 RM2.05/RM0.70

BUY
(Maintained)
Rationale for report: Company Visit
Investment Highlights

We re-affirm our high conviction BUY on Berjaya Auto (BAuto) following recent meeting sessions with management as well as a plant visit. Our fair value is raised to RM3.00/share (from RM2.50/share previously) after raising our earnings projections and rolling over our valuation to CY15F earnings. Management expects FY14F volumes at 9K-10K units (+25% YoY), rising by 30%-48% to 13K-14K in FY15F; these are 3%-11% higher than our FY14F-15F estimates. The CBU 2.0 litre Mazda 3 (C-segment) was launched in mid-Mar 2014 with initial orders hitting 150-200 units. The CKD launch, which entails a 1.5 litre variant, is expected in Oct 2014 and should be a huge volume kicker. Management has a volume target of 5K/annum for the Mazda 3 (vs. our forecast of 3.2K/annum). The Mazda 6 CKD (Dsegment) will be launched in 4QFY15F at production of 250/month vs. our sales assumption of 190/month. This is the next model slated for exports. New models in the pipeline that we have yet to factor in include the CX3 (a high volume Bsegment SUV) and a new CX5 variant (both in FY16F). BAutos EEV incentive application for the CKD CX5 was approved last quarter. This raises the excise duty rebates it is enjoying by 25% from the existing base. Duty cost is huge, at up to 40%-45% of operating cost. We estimate the CX5s cost to drop by 10%-11% post-incentive, mainly from 4QFY14 as CKD production recovery becomes more pronounced. Management targets CKDs to account for 75% of TIV in FY15F (vs. our FY14F: 44%, FY15F: 67%, FY16F: 83%) mainly due to the deviation in Mazda 3 projection. Any higher than expected sales of the Mazda 3 means upside to both our volume and margin forecasts. Production at Inokom has improved to 800-900/month from 400500/month in the past quarter following Mazdas assistance in resolving production issues. A dedicated Mazda trim & final shop will be ready by end April, which will increase capacity to 1,300-1,400/month. MMSB is also considering constructing its own paintshop to free up the current production bottleneck, which can further expand capacity by 80% to 2,500/month. We raise our projections by 4%-18% over FY15-16F (and FY14F by 1%) to factor in higher duty savings gained from EEV incentives and Mazda 6 exports at a rate of 4K/annum from 4QFY15. Our projections are now 20%-30% higher than consensus. Even the strong outperformance in its recent 3QFY14 results (which exceeded consensus expectations by 22%) has yet to be reflected in the share price. At 10.6x FY15F PE, BAuto trades at a16% discount to the sector despite having the strongest growth trajectory driven by a more efficient cost base from a switch to a CKD-driven business model. Over the past 3 months, consensus earnings have been revised up by 23% (See Chart 2). Net cash of RM178mil (FY15F) accounting for 12% of market cap, suggests room for acquisitive growth. In the near-term, a recovery in Mazda TIV following its production recovery and outperformance in upcoming 4QFY14F results are strong catalysts.

Free Float (%) Avg Daily Value (RMmil) Price performance Absolute (%) Relative (%)
4.00

1,966

3.00

1,874 I n d e x 1,781 P o i n t s

) M 2.00 R (

1.00

1,689

0.00 N o v 1 3
BerjayaAuto FBM KLCI

1,596

PP 12247/06/2013 (032380)

Berjaya Auto Bhd We re-affirm our BUY call on Berjaya Auto (BAuto) following recent meeting sessions with management as well as a plant visit. Our fair value is raised to RM3.00/share (from RM2.50/share previously) after raising our earnings projections and rolling over our valuation to CY15F earnings. We continue to peg BAuto at 13x PE, at a premium to sector PE due to above-industry growth rate, exposure to high growth overseas markets in Thailand and the Philippines and its status as the best proxy to Malaysias EEV program. Among key topics of discussion during the meetings were:- (1) Volume targets and new model strategies over the next 3 years; (2) Addressing production issues which are holding back BAutos earnings potential; and (3) BAutos status in the Energy Efficient Vehicle (EEV) program.

4 April 2014
model to be a critical volume driver for BAuto from 2HFY15F onwards. Management has a base case volume target of 4,800/annum (400/month) for the new Mazda 3, and a blue sky target of 10,000/annum (vs. our conservative forecast of 3,200/annum, or 267/month). Key competitors in the C-segment include the Honda Civic, Toyota Altis and the Nissan Sylphy. While all these models entail cheaper pricing than the CBU Mazda 3, the 1.5 litre CKD variant will be uniquely positioned at the higher end of the high volume B-segment and at the lowest end of the C-segment price range.

TABLE 1 : MAZDA 3 CKD UNIQUELY POSITIONED IN BETWEEN B / C-SEGMENTS

Competing models Pricing (RM)

Toyota Altis (1.6 )

103,676 128,426 112,791 - 133,245 111,743 - 121,483

Scope for upside to volume targets

Management expects FY14F Mazda TIV of between 9,600 9,800 units (+25% YoY), rising by 30% to 13,000-14,000 in FY15F. These volume targets are 3%-11% higher than our forecast of 9,720 units for FY14F and 12,636 units for FY15F, suggesting that there is scope for upside to our projections, in particular FY15F which is the base year for our valuations currently. A key volume driver for FY14F is the launch of the CKD CX5 in May 2013, while FY15F will be driven mainly by the launch of the new C-segment Mazda 3. The new Mazda 2 should help to support volumes, to a certain extent. On top of this, the CKD Mazda 6 is likely to be launched in the final quarter of FY15F.

Toyota Altis (2.0 ) Honda Civic (1.8 - 2.0) Nissan Sylphy (2.0)

Mazda 3 (2.0) SkyActiv (CBU) Mazda 3 (1.5) SkyActiv (CKD)

138,935 Sub 90,000

Toyota Vios (1.5) Nissan Almera (1.5) Honda City (1.5) Source: Company / AmResearch

71,105 - 89,451 66,800 - 79,800 75,800 - 90,800

The new Mazda 2 - a CBU B-segment model?

The new Mazda 2 (B-segment) is slated for launch in 4QCY14. The model will be imported as CBU from Thailand, in line with Mazdas broader plan to use Thailand as a hub for small, high volume models and Malaysia as a hub for premium, high value models. While the B-segment is typically a volume driver, the high duty costs that comes with a CBU does not position the Mazda 2 favourably against rivals. Even though the model is fuel efficient, it does not qualify for EEV incentives as it is not assembled locally. The current generation Mazda 2 (1.5 litre engine) is also brought in as a CBU and is priced at RM78K-82K. Key rivals such as the Toyota Vios and Nissan Almera meanwhile are priced at RM60K-90K as a comparison. The Mitsubishi Attrage, which is an Eco Car qualified model is imported as CBU but priced at RM59K-75K, albeit with a smaller 1.2 litre engine. Indications are that the new Mazda 2 will also be manufactured in 1.5 litre variants in Thailand, which means it will not qualify for Thailands Eco Car program either, given a ceiling of 1.4 litre engines for the Eco Car program. It is understood that Mazda Japan is considering using a 1.3 litre SkyActiv engine (from the Demio) specifically for 2

Mazda 3 positioned as a key volume kicker

The new Mazda 3 (C-segment model) was officially th launched on 19 March with a price tag of RM139K, while CKD launch is targeted for October 2014 delayed from June 2014 target due to supply constraints from Japan. Prior to that, the new Mazda 3 had a soft launch in January 2014 and some 87 units have been delivered to customers (prior to official launch). Only variants with 2 litre engine capacity are available for the CBU Mazda 3. Meanwhile, the CKD Mazda 3 will be offered in 2 litre and a high volume 1.5 litre variant. Given the duty savings derived from local assembly, the Mazda 3s pricing could potentially be lowered by RM10,000-15,000 (for the 2 litre variant). More importantly, the 1.5 litre variant (which is only available in CKD form) can be priced within a Bsegments price range i.e. sub RM90,000. We expect this

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Berjaya Auto Bhd the Mazda 2 models to be produced in Thailand, but tweaks will have to be done as the 1.3 litre engine may not be able to achieve sufficient fuel economy to qualify for the Eco Car program. The Mazda 2s body and weight was designed to be powered by a 1.5 litre engine. Mazda is the only major Japanese player that has yet to participate in Thailands Eco Car program and if the Mazda 2 does not qualify, the model will be priced at a disadvantage against local competition such as the Toyota Yaris and Nissan March. Thailands Eco Car program entails a reduction in luxury tax to 14% vs. 30% imposed on non-Eco Cars. Unlike most of its rivals, Mazda does not have much choice in choosing cars for the Eco Car project as the Mazda 2 is the only model in its global portfolio that has the potential to qualify for the program. And unlike Malaysias EEV program which covers the whole spectrum of passenger vehicles, Thailands Eco Car program is solely focused on the compact car segment.

4 April 2014

TABLE 2 : LIST OF NEW LAUNCHES

Potential New Launches Segment FY14F CX5 CKD Mazda 6 CBU Biante Mazda 3 CBU FY15F Mazda 3 CKD Mazda 6 CKD Mazda 2 CBU FY16F CX5 (7-seater variant) CX3 C-segment SUV B-segment SUV Honda CRV / Nissan X-Trail / Kia Sportage Toyota Rush C-segment D-segment B-segment Toyota Altis / Honda Civic / Nissan Sylphy / Toyota Vios / Honda City Toyota Camry / Honda Accrod / Nissan Teana / Kia Optima / Hyundai Sonata Toyota Vioa / Honda City / Nissan Almera C-segment SUV D-segment MPV C-segment Honda CRV / Nissan X-Trail / Kia Sportage Toyota Camry / Honda Accrod / Nissan Teana / Kia Optima / Hyundai Sonata Nissan Serena / Toyota Avanza Toyota Altis / Honda Civic / Nissan Sylphy Key competitors

CKD Mazda 6, the next export kicker

The SkyActiv Mazda 6 was launched in CBU form in April 2013. The model is currently sold in 2 litre and 2.5 litre variants priced at RM159K and 189K respectively and generates collective volumes of 160-170/month, on average. From 1QCY15, the Mazda 6 will be locally assembled at the Inokom plant. As an indication, the CKD variant could be priced up to RM20,000 cheaper than the CBU version given the excise duty savings i.e. RM139K for the 2 litre variant and 169K for the 2.5 litre variant on our estimates, cheaper than key rivals; the Honda Accord 2 litre priced at RM139K-146K and Toyota Camry 2 litre priced at RM149K-158K. More importantly, the Mazda 6 is also the next model slated for exports to Thailand after the CX5. Based on current production plans, circa 3,000-4,000 per annum capacity will be allocated for Malaysia and another 4,0005,000/annum for exports to Thailand.

Source: Company / AmResearch

AmResearch Sdn Bhd

Berjaya Auto Bhd

4 April 2014
However, the capacity expansion is specifically for the trim & final process and a bottleneck still arises from the paintshops limited capacity.

SUPPLY ISSUES BEING ADDRESSED

CBUs as stop-gap to meet overwhelming demand
BAuto has brought in 600 CBU units of the CX5 (2.5 litre variants) to address overwhelming demand and production hiccups at the Inokom plant. These higher spec and higher capacity CBUs are sold at circa RM10,000-15,000 higher than the highest 2 litre CKD variant, and priority goes to customers who are already in the waiting list. Circa 500 units have been delivered and BAuto is in talks with Mazda Japan to bring in an additional 300 units this month, on top of the initial batch. BAuto has an overall booking bank of up to 3,000 units comprising mainly of the CX5 and to a certain extent, the Biante. This is equivalent to circa four months waiting list in general and up to six months specifically for the CX5. Demand is clearly not an issue at this point for BAuto, but rather, it is supply constraint that is holding back the groups earnings potential.

New paintshop to free up more capacity

Management is in discussions to construct its own paintshop at Inokom to free up the bottleneck at its plant. Currently, BAuto is outsourcing the paint process to Inokom as part of its contract assembly arrangement. The existing paintshop facility provided by Inokom can provide a capacity of up to 10,000/annum specifically for Mazda, and further improvements are in the works to increase this up to 20,000/annum to match Mazdas dedicated trim & final shops capacity, once it is up and running. If MMSB proceeds with its own paintshop, total capex is estimated at RM80-100mil. Mazdas own paintshop can further expand installed capacity to 30,000/annum. Construction is expected to take between 8 to 12 months, once a decision is finalised. We see this as another catalyst for BAuto as the freeing up of production capacity will allow for more, higher margin CKD models to be produced locally.

Production hiccups being addressed

The production issues at the Inokom plant are expected to be gradually resolved - Mazda has sent their production team to assist and we gather that production has already improved to 800-900 a month from 400-500 a month in the past quarter. The issues faced are mainly rigid quality issues (rather than safety issues) and problems arose from manpower skills. It is unofficially agreed with Mazda Japan that 60% of available capacity at the groups Inokom plant will be allocated for exports to Thailand and 40% for the domestic market. However, this is not a cast-in-stone arrangement and there is flexibility in the allocation.

Light capex, high growth

Additionally, the increase in MMSBs own dedicated production processes (which comes with MMSBs own investments) should come with a reduction in contract assembly fees paid to Inokom as production processes outsourced to the latter gradually lessen. It is also important to bear in mind that BAuto only owns a 30% stake in MMSB, which means the improvement in production comes at little incremental investment as the majority is taken up by Mazda Japan (which holds 70% in MMSB).

New trim & final shop ready by April

Currently, MMSB only owns its own body shop (which entails the welding of the basic frame of the car up to the fitting of body parts that come as part of CKD packs). The rest of the processes i.e. paintshop and trim & final shop and inspection are outsourced to Inokom, where available capacity has to be shared with other models that Inokom contract assembles. MMSBs new trim & final shop (which is dedicated for Mazda production) will be ready by end April 2014. This will expand Mazdas current trim & final shops production rate from 4-5 Jobs per Hour (JPH) to 7-8 JPH. The higher JPH extracted from the MMSBs own dedicated trim & final shop translates into absolute installed capacity expansion from 10,000-12,000/annum up to 16,000/annum (on our estimates, based on 5day/week runs).

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Berjaya Auto Bhd

4 April 2014

COST REDUCTION KICKING IN

Incremental duty rebates kicking in
BAuto had its EEV (Energy Efficient Vehicle program) incentive application for the CX5 approved last quarter. This raises its excise duty rebates by 25% from the existing base. As production of the CKD CX5 is gradually raised (and accounts for a bigger proportion of sales), savings from the duty rebates will be more pronounced. We estimate CKD CX5 overall cost to drop by 10%-11% post-incentive, which will be mainly reflected from 4QFY14 onwards as production recovery becomes more significant. CKDs are expected to account for 67% of sales in FY15F from a mix of the CX5 and Mazda 3, (FY14F: 44% entirely form the CX5) rising to 83% in FY16F full year impact of Mazda 6 and Mazda 3 CKD. Management has a more aggressive target of 75% of sales coming from CKD models in FY15F. We understand that most of the new generation SkyActivequipped Mazda models stand to qualify for Malaysias EEV program and hence, will benefit from similar excise duty rebates. Despite benefits from the duty incentives, we conservatively expect operating margins to ease slightly to 10.3% in FY15F (vs. 11.2% in FY14F) as the 1.5 litre CKD Mazda 3 is expected to be a volume-driven model with lower base margins than the CX5. Nonetheless, Fy16F should see stronger margins of close to 12% once the Mazda 6 CKD kicks in meaningfully.

CHART 1 : PERCENTAGE OF SKYACTIV VEHICLES

Source: Company / AmResearch

Qualifying for EEV status

Unlike Thailands Eco-Car program which limits qualification only for vehicles <1.2 litre (for gasoline engines); Malaysias EEV program is a lot more comprehensive and consist of the whole spectrum of passenger vehicles. Qualification for the different classes of passenger vehicles entails different fuel efficiency requirements. The CX5 is Mazdas first model introduced in Malaysia that is equipped with SkyActiv technology. The model can achieve fuel efficiency of up to 6.9 litres/100km based on Mazdas tests (12%-21% more efficient) versus a typical 7.8 - 8.7 litres/100km for other models in its class (See Table 4-5). Given the significant fuel efficiency that the CX5 is able to achieve via the SkyActiv technologies, the model is qualified as an EEV. Being qualified as an EEV status model gives the CX5 exceptionally higher excise duty rebates compared to non-EEV models that are assembled locally, hence giving it a strong competitive edge of having a lower cost base and improved price positioning capability.

SkyActiv technology in brief

SkyActiv technology encompasses innovations in various components of a car (such as engine, transmission, chassis and a lightweight body frame) to achieve significant fuel efficiency and improvements in drive capability e.g. improved torque (See next section of this report for more details on Mazdas SkyActiv technology). Since the global launch of the first SkyActiv model in 2012, the response for SkyActiv equipped models has been overwhelming;utilising this high brand value, Mazda aims to reduce reliance on price discounting to push its products through in the market. With the global launch of the new Mazda CX5 from February 2012 as an opening round, Mazda plans to globally release eight new models fully equipped with SkyActiv technology over the next 4-5 years. Mazda Japan estimates that the number of SkyActiv equipped models as a percentage of total sales to increase to 80% by March 2016 from 30% in fiscal year March 2013.

TABLE 3 : EEV FUEL EFFICIENCY REQUIREMENT

Fuel efficiency requirement (litre/100km) 4.5 5.0 6.0 6.5 7.0 9.5 11.0 11.5 12.0

Segments A

Kerb weight (kg) <800 801 - 1000

Details Micro Car City car Super Minicar Small Family Car Large Family Car/ Compact Executive Car Executive Car Luxury Car Large 4x4 Others

B C D E F J Others

1001 - 1250 1251 - 1400 1401 - 1550 1550 - 1800 1801 - 2050 2051 - 2350 2351 - 2500

Source: MITI, AmResearch estimates

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Berjaya Auto Bhd

4 April 2014
75% and therefore only 25% of the content of the vehicle is chargeable by excise duties. In short every Ringgit value of component that is localised will be matched by RM1.50 in excise duty rebate (in the case of a 1.5x IAF multiplier). To be more specific, say for example, a car that entails exfactory cost of RM100,000, of which RM50,000 of the cost is derived from Malaysia (i.e. a 50% localisation rate); under the current IAF system, the amount of excise duty charged on the car would be 75% (i.e. we use the duty rate for a 1.5 litre B-segment model) on the value of imported kits (in this case, RM50,000), translating into an absolute excise duty charge of RM37,500. However, with an IAF multiplier of 1.5x, the localisation rate is artificially increased to 75%, meaning only RM25,000 (or 25%) of the vehicle content is charged with the 75% excise duty rate, translating into total excise duty cost of just RM18,750. This is 50% lower than the excise duty payable of RM37,500 without the IAF multiplier, as explained in the prior paragraph. This also translates into an effective excise duty rate of just 18.8% (i.e. RM18,750/RM100,000) versus the average 40%-50% that most non-nationals are paying currently (See Table 7). With the adjustment to the IAF system, Malaysias vehicle excise duty structure becomes a lot more competitive relative to that of Thailands 17%-40% and Indonesias 30%-75%, which does not practice a localisation-driven excise duty rebate system like Malaysia.

TABLE 4 : SKYACTIV CX5 SUPERIOR FUEL EFFICIENCY

Fuel consumption (litre per 100km) Mazda CX5 (2.0) SkyActiv Honda CRV (2.0) Nissan X-Trail (2.0) Hyundai Santa Fe (2.0) Kia Sportage (2.0) Source: Various / AmResearch 6.9 7.8 8.4 8.5 8.7

TABLE 5 : SKYACTIV MAZDA 3 FUEL EFFICIENCY

Fuel consumption (litre per 100km) Mazda 3 (2.0) SkyActiv Mazda 3 (1.5) SkyActiv Toyota Vios (1.5) Nissan Almera (1.5) 6.6 4.7* 6.3 6.7

Honda City (1.5) 7.1 * Exact technical information yet to be released by Mazda, based on various external reviews Source: Various / AmResearch

More duty savings for EEV qualified models

Technically, the CX5 is estimated to have achieved 40% localisation rate which means that 60% of the CX5s exfactory cost is charged by the 75% official Malaysian excise duty rate (for <2 litre SUVs) - whereby this works out to an effective excise duty payment of 45%. However, given the incremental excise duty rebates awarded to EEV qualified models, we estimate the effective excise duties paid for the CX5 is driven down further to circa 38% (from 45%), allowing the model:- (1) To be priced competitively against other locally assembled models competing in the same segment (See Table 6); and (2) Effective excise duty rate which is comparable to Thailands 35% for <2.4 litre SUVs.

TABLE 7 : EXAMPLE ON IMPACT OF IAF ADJUSTMENT

Current scenario (RM) - typical localisation rate of 50% for non-national A B C B/A D E=Dx C F =E/ A Total cost of a car of which: Local cost of which: Imported cost Localisation rate Excise duty rate Excise duty paid Effective excise duty rate 100,000 50,000 50,000 50.0% 75.0% 37,500 37.5%

TABLE 6 : CX5 PRICED COMPETITIVELY VS. CKD PEERS

EEV scenario (RM) - typical localisation rate of 50% for non-national

Price (RM/unit) Mazda CX5 (2.0) SkyActiv (CKD) Honda CRV (2.0) (CKD) Nissan X-Trail (2.0) (CKD) Source: Company / AmResearch 136,943 - 154,385 148,800 148,800

A B C D=B/ A E F G=F x D I=Ex H J =I/ A

Total cost of a car of which: Local cost of which: Imported cost Localisation rate Excise duty rate IAF multiplier Localisation rate post-IAF Excise duty paid Effective excise duty rate

100,000 50,000 50,000 50.0% 75.0% 1.5 75.0% 25,000 18,750 18.8%

How do the duty incentives work?

Auto manufacturers and distributors are the key beneficiaries of the duty incentives offered under the EEV program. Under a modified IAF (Industrial Adjustment Fund) system, instead of the dollar-to-dollar excise duty rebate system, regulators are expected to extend the matching system on a multiplier basis. As an example, assuming a particular model achieves 50% localisation rate, but is awarded an IAF multiplier of 1.5x; the model is considered to have a localisation rate of AmResearch Sdn Bhd

H = (1 - G) x A Effectiv e imported cost post-IAF

Source: Company, AmResearch estimates

As the IAF multiplier offered under the EEV incentive scheme ranges from 1.1x to 1.6x, this means that local players have the opportunity to lower excise duty cost by up to 60% from the current base.

Berjaya Auto Bhd The incentive will have a significant impact on cost saving (and potentially car pricing if passed on to consumers) as excise duty cost accounts for up to 30%-40% of the cost of sales of a car manufacturer currently. More importantly, if a manufacturer increases an EEV models base localisation rate to circa 65% (using the same example), the effective excise duty rate paid by manufacturers can reduce to almost zero (See Table 8).

4 April 2014
As it is, the strong outperformance in BAutos 3QFY14 results (which exceeded consensus expectations by 22% if annualised) has yet to be reflected in the share price. At 10x FY15F PE, BAuto is trading at 16% discount to sector average despite having the strongest growth trajectory driven by rising cost efficiency from a switch to a CKD-driven business model. Over the past 3 months, consensus earnings have been revised up by 23%. Net cash of RM178mil (FY15F) accounting for 12% of market cap, suggests room for acquisitive growth. In the near-term, a recovery in Mazda TIV following its production recovery and outperformance in upcoming 4QFY14F results are strong catalysts.

TABLE 8 : EFFECTIVE DUTY CAN REDUCE TO ALMOST 0%

EEV scenario (RM) - assuming localisation rate increases to 65% A B C D= B / A E F G=F x D I=Ex H J =I/ A Total cost of a car of which: Local cost of which: Imported cost Localisation rate Excise duty rate IAF multiplier Localisation rate post-IAF Excise duty paid Effective excise duty rate 100,000 65,000 35,000 65.0% 75.0% 1.5 97.5% 2,500 1,875 1.9%

CHART 2 : BAUTO EARNINGS REVISION TREND

H = (1 - G) x A Effective imported cost post-IAF

Source: Company, AmResearch estimates

WHERE WE STAND AGAINST CONSENSUS?

FY15Fs 30% growth in volumes, mainly driven by the Mazda 3, should drive earnings up by 22%. Meanwhile, FY16Fs 26% earnings growth will be driven by a combination of margin expansion (from 10.3% to 11.9%) on top of a 10% volume growth driven by the CKD Mazda 6 and introduction of the CX3 towards 2HFY16F. As it is, our current projections are already 20%-30% higher than consensus over FY14F-16F and there is potential for further upside against our conservative volume forecast for the Mazda 3, in particular.

Source: Bloomberg / AmResearch

Key deviation against consensus?

A notable area of deviation between our forecast and consensus is BAutos operating margin. AmResearch forecasts operating margins of 11.2% (FY14F), 10.3% (FY15F) and 11.9% (FY16F), which are markedly higher than consensus 9% (FY14F), 8.4% (FY15) and 9.3% (FY16F). As of 9MFY14 results, BAuto had already achieved operating margins of 10.9% (and 13.5% specifically for 3QFY14). This is perhaps, a key area of upside to look forward to in terms of consensus earnings revision in the near-term. The expansion in BAutos operating margins from a mere 7% in FY13 was driven mainly by the gradual transformation to a CKD-driven business model, which has been at the core of our investment thesis, on top of EEV incentives and production recovery which will further support margin expansion going forward. AmResearch Sdn Bhd 7

Berjaya Auto Bhd

4 April 2014

APPENDIX: THE INOKOM PLANT IN BRIEF

Inokom is a contract assembly plant majority owned by Sime Darby (51% stake). Other minority holders of the plant are Berjaya Corporation (15%), Pesumal (14%), Hyundai Motor Company (15%) and Sime Darby-Hyundai (5%). The Inokom plant has a total capacity of 30K-40K/annum on two shifts, but production is highly scalable. Current built-up area of the plant consumes 95 acres of land, but there is still huge unutilised land of 105 acres to expand on. Inokom has an authorised capital of RM500mil with paid up capital of RM100mil currently. MMSB is a 70:30 JV between Mazda Corporation and BAuto which houses the groups manufacturing operations in Malaysia. It has a paid up capital of RM100mil currently. MMSBs investment at this juncture, is in the body shop within Inokoms plant area. The body shop which is fully funded by MMSB is a dedicated body shop for Mazda models. Other production processes i.e. paintshop and trim & final shop are contracted out to Inokom, hence are shared with other makes that are contract assembled by Inokom. MMSB pays Inokom contract assembly fees for the paintshop and trim & final processes, while for the body shop (which is owned by MMSB), payments are only for overheads and labour provided by Inokom. There are also land lease payments to Inokom for the bodyshop that MMSB owns within Inokoms land area. As more and more processes are undertaken by MMSB itself, contract assembly fees paid to Inokom should reduce from the current estimated USD2000-3000 per car.

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Berjaya Auto Bhd

4 April 2014

TABLE 9 : FINANCIAL DATA

Income Statement (RMmil, YE 30 Apr) Revenue EBITDA Depreciation Operating income (EBIT) Other income & associates Net interest Exceptional items Pretax profit Taxation Minorities/pref dividends Net profit Core net profit Balance Sheet (RMmil, YE 30 Apr) Fixed assets Intangible assets Other long-term assets Total non-current assets Cash & equivalent Stock Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders funds Minority interests BV/share (RM) Cash Flow (RMmil, YE 30 Apr) Pretax profit Depreciation Net change in working capital Others Cash flow from operations Capital expenditure Net investments & sale of fixed assets Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Others Cash flow from financing Net cash flow Net cash/(debt) b/f Net cash/(debt) c/f Key Ratios (YE 30 Apr) Revenue growth (%) EBITDA growth (%) Pretax margins (%) Net profit margins (%) Interest cover (x) Effective tax rate (%) Net dividend payout (%) Debtors turnover (days) Stock turnover (days) Creditors turnover (days) Source: Company, AmResearch estimates 2013 1,064.4 81.7 (6.1) 75.6 (1.5) (4.8) 0.0 69.3 (17.2) (1.2) 50.9 50.9 2013 20.3 0.5 41.8 62.6 240.0 193.8 31.4 15.6 480.8 83.2 126.6 79.2 288.9 2.4 32.2 34.7 212.6 7.3 0.26 2013 69.3 6.1 126.3 (148.6) 53.1 (14.2) (25.5) 0.9 (38.8) 89.6 64.2 0.0 (5.2) 148.5 162.8 77.2 240.0 2013 n/a n/a 6.5 4.8 15.7 24.8 0.0 n/a n/a n/a 2014F 1,464.2 173.9 (9.4) 164.5 10.1 (1.8) 0.0 172.8 (40.7) (4.7) 127.4 127.4 2014F 30.2 0.5 56.4 87.0 182.2 266.6 43.2 15.6 507.6 114.4 46.6 79.2 240.1 2.4 32.2 34.7 307.9 12.0 0.38 2014F 172.8 9.4 (53.3) (50.0) 78.9 (20.0) (4.5) 0.0 (24.5) (80.0) 0.0 (32.1) 0.0 (112.1) (57.8) 240.0 182.2 2014F 37.6 112.9 11.8 8.7 90.0 23.5 25.2 9 57 25 2015F 1,851.2 202.2 (11.9) 190 19.4 (0.3) 0.0 209.3 (47.5) (6.3) 155.5 155.5 2015F 37.5 0.5 75.7 113.7 186.8 337.0 54.6 15.6 594.1 144.6 6.6 79.2 230.4 2.4 32.2 34.7 424.5 18.3 0.53 2015F 209.3 11.9 (51.6) (66.1) 103.5 (20.0) 0.0 0.0 (20.0) (40.0) 0.0 (38.9) 0.0 (78.9) 4.6 182.2 186.8 2015F 26.4 16.2 11.3 8.4 565.7 22.7 25.0 10 60 26 2016F 2,007.2 253.5 (13.7) 239.8 24.1 (0.3) 0.0 263.5 (59.9) (7.6) 196.1 196.1 2016F 43.0 0.5 99.8 143.3 291.1 365.4 59.2 15.6 731.4 156.8 6.6 79.2 242.5 2.4 32.2 34.7 571.5 25.9 0.71 2016F 263.5 13.7 (20.8) (83.1) 173.3 (20.0) 0.0 0.0 (20.0) 0.0 0.0 (49.0) 0.0 (49.0) 104.3 186.8 291.1 2016F 8.4 25.4 13.1 9.8 713.0 22.7 25.0 10 64 27

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