My Portfolio Sep20

Summary for September 2020

Portfolio @ End of Sep20

   

    

Finally I sold all my BAuto shares. This is another one which saw a 50% paper gain turning into 27% paper loss, almost the same fate as Hevea.

However, I still manage to register overall gain from these 2 investments, thanks to their high dividends.

When I bought BAuto in Oct15, it was for its growth potential, not its dividends. I predicted that Mazda could overtake Nissan as the third largest foreign passenger car brand in Malaysia.

Up to today, Mazda is still behind Nissan, although the gap has narrowed. Mazda's strategy to build a more premium brand image and keep a higher profit margin has hindered its progress to overtake Nissan.

Slowly BAuto has turned from a growth stock to a dividend stock. As I only want growth at this stage of my investment journey, I decided to sell since last year but only manage to sell now after its share price has dropped so much.

BJAuto: Strong Yen A Major Concern

Berjaya Auto FY16Q2 Financial Result

BJAuto (RM mil)	FY16Q2	FY16Q1	FY15Q4	FY15Q3	FY15Q2
Revenue	542.4	512.5	424.3	388.8	508.8
Operating Profit	70.9	68.0	72.0	65.1	77.0
OP%	13.1	13.3	17.0	16.7	15.1
Assoc profit	1.2	4.2	3.6	-0.7	2.4
PBT	73.7	73.5	77.2	66.2	81.0
PBT%	13.6	14.3	18.2	17.0	15.9
PAT	55.9	55.0	57.0	48.5	59.6
PATAMI	53.1	52.2	55.3	46.5	57.5
MAS Rev	425.7	424.5	360.2	319.8	436.3
MAS OP	61.4	58.6	67.2	57.8	70.1
PHI Rev	116.7	88.1	64.1	69.0	72.6
PHI OP	9.9	9.8	6.0	6.8	7.4
Total Equity	491.4	462.0	476.6	447.2	418.6
Total Assets	865.0	805.4	732.0	751.6	688.1
Trade Receivables	125.6	149.1	104.7	81.3	87.1
Inventories	341.1	293.2	215.6	223.7	188.6
Cash	248.8	221.9	280.8	318.7	313.1
Total Liabilities	345.9	321.8	236.4	286.6	255.6
Trade Payables	195.6	184.3	121.4	122.3	84.3
ST Borrowings	0.0	0.0	0.0	0.0	0.0
LT Borrowings	0.0	0.0	0.0	0.0	0.0
Net Cash Flow	-42.0	-61.7	90.3	126.2	126.8
Operation	52.9	5.5	222.1	226.3	172.8
Investment	0.3	0.5	-38.3	-33.2	-2.2
Financing	-95.2	-67.7	-93.6	-66.9	-43.8
Dividend paid	94.1	68.4	98.1	70.8	44.4
EPS (sen)	4.66	4.58	6.80	5.74	7.12
NAS (sen)	43.16	40.44	58.59	55.03	51.80
D/E Ratio	NC	NC	NC	NC	NC

There is really nothing much to discuss regarding BJAuto's latest FY16Q2 result. 

Revenue hits record high but profit margin drops.

This is largely due to unfavourable sales mix, unfavourable forex, and higher operating cost due to expansion of 3S and repair centers.

It remains debt-free, asset-light and continue to pay good quarterly dividend.

It has declared a second interim dividend of 2.5sen. Total dividend in FY16 is 4.75sen so far.

I invested in BJAuto simply because I like Mazda and I have confidence in Mazda's prospect in Malaysia.

I don't expect its FY16 financial result next year to be better than FY15. 

I just think that in the long run, it will continue to sell more cars.

I expect Mazda to challenge other Japanese auto makers in the country.

In year 2014, Mazda sold 11,382 vehicles representing 1.7% market share, while Nissan sold 39,932 vehicles with 6% market share.

So when Mazda manage to sell 40,000 vehicles a year like Nissan did last year, how much revenue and profit can it generate?

In 2014, Toyota & Honda sold 102,035 and 77,495 units respectively.

I think previously Mazda did not do well in Malaysia because of poor distributorship and lack of price competitiveness as they are not locally assembled.

It is not because Mazda's vehicles are inferior to fellow popular Japanese makers.

So when the volume and demand are low, resale value will also be low. This makes Mazda even more unpopular in the auto market.

With more established distribution network in Bermaz, introduction of CKD vehicles, superb SkyActiv technology and futuristic Kodo design, I think Mazda should be on par with Toyota, Honda & Nissan in the future in Malaysia.

These are just my opinion and I might be wrong.

Hyundai, Kia, Ford, Peugeot etc seems to offer great & exciting cars at very competitive price but the challenge they posed to those top Japanese brands here seems to be short-lived.

In other countries which I think their Mazda distributorship should not be too bad like the US, Mazda's sales still trail Toyota by a great distance.

Anyway, globally Mazda's sales have pick up in recent years after the introduction of Kodo design and Skyactiv technology which offer greater fuel-saving.

Mazda Japan does not do much research on hybrid and electric vehicles. So, it is understandable that it does not sell such cars in Malaysia.

This is a concern for me as I think hybrid/electric cars should dominate the future.

However, Mazda does collaborate with Toyota to share the latter's hybrid technology and in return, Mazda will share its Skyactiv engine technology with Toyota.

I think it is a win-win deal for both parties, and Mazda can concentrate to further improve its petrol engine's efficiency. 

Mazda does have a line-up for hybrid car in Mazda 3 in Japan. I'm not sure whether we can see it in Malaysia.

Mazda Skyactiv cars are given EEV (Energy Efficient Vehicle) status in Malaysia which can enjoy some tax incentive.

This tax incentive enables Mazda cars to be priced more competitively compared to others.

The EEV status is determined based on fuel consumption and carbon emission level.

All auto manufacturers are aiming for EEV status for sure. Honda City is already categorized as an EEV.

How fuel-efficient is Mazda's Skyactiv's vehicles?

For comparison, Mazda Biante's (Skyactic 2.0L) fuel economy is rated at 7.4L/100km, compared to Nissan Serena S-hybrid (2.0L) at 6.6L/100km, both with almost similar weight.

Mazda 5 2.0L Skyactiv, which is about 125kg lighter, is rated at 6.6L/100km.

So we can see that Mazda's Skyactiv petrol engine vehicles are very fuel-efficient and almost comparable to some hybrid cars.

Since BJAuto took over the distributorship of Mazda vehicles in Malaysia, it has launched almost all new or facelifted models available in Mazda's lineup.

More recent launches include:

• Dec15 - CX-3 (CBU)
• Aug15 - MX-5 (CBU)
• May15 - CX-5 2.5L facelift (CBU)
• Apr15 - Mazda 3 2.0L (CKD)
• Apr15 - Mazda 6 facelift (CBU)
• Jan15 - Mazda 2 (CBU Thai)
• May14 - Mazda 5 Skyactiv (CBU)
• Mac14 - CX-5 2.5L (CBU)
• Mac14 - Mazda 3 2.0L (CBU)
• Nov13 - Biante (CBU)
• Jun13 - CX-5 CKD
• Mac13 - Mazda 6 (CBU)
• Aug12 - BT50 (CBU Thai)
• May12 - CX-5 (CBU)

It will be good if Mazda can come up with small MPV to rival Avanza which is quite popular here.

However, there is no such Mazda vehicle available in the whole world.

Bermaz has just launched its B-segment crossover CX-3 last week to rival the hot-selling Honda HR-V, even though the price of RM135k (OTR with insurance) definitely does not help in the competition.

I have to admit that HR-V is a great car with great look, which should have lured some potential CX-5 buyers away.

High-spec HR-V is priced at RM118k, and now it is basically everywhere on the road.

Anyway, HR-V is CKD with 1.8L engine & 16-inch rim, while CX-3 is CBU Japan with 2.0L engine & 18-inch rim.

The only way for CX-3 to rival HRV here is to CKD the car and makes the high-spec RM120k, and offer a lower spec at RM100k.

According to analyst, upcoming new launches should be facelifted CKD CX-5, diesel-run Mazda 2/CX-5, CKD Mazda 6 and may be CKD CX-3.

Those diesel engine models will not generate big volume as Euro 5 diesel availability is still very limited in Malaysia.

Bermaz just brought in 2000 units of CX-3 from Japan and will not consider to import from Thailand as it is said that import from Thailand will incur more tax.

So, it will consider to CKD CX-3 in Malaysia and I hope so.

          Mazda CX-3

Mazda Corporation currently 3 plants in ASEAN region

• Thailand Auto Alliance (50:50 JV with Ford)
• Vietnam Vina Mazda (100% local control) 10,000 units/annum (left hand drive)
• Malaysia MMSB (70:30 JV with Bermaz)

The other reason I like BJAuto is because of its assets-light operation. It does not own a manufacturing plant directly so there is no high capex, high depreciation charge and high operating cost.

It just concentrates on retailing and distributing the vehicles.

Mazda's manufacturing operation in Malaysia is controlled by MMSB which is 30% owned by BJAuto.

Its manufacturing activity is carried out by Inokom in Kulim which has a capacity of 50,000 per annum, in which BJAuto also has 24% stake in it.

As Inokom also assembles BMW, Ford, Hyundai, Land Rover and Mini besides Mazda cars, BJAuto is actually not totally about Mazda.

MMSB has its own dedicated body shop, trim & final assembly shop within Inokom. It has recently upgraded its paint shop and this has increased its annual production capacity to 25,000. 

MMSB will import CKD kits from Japan and gives them to Inokom for assembling, and Bermaz will purchase the finished products from MMSB for retail and distribution in Malaysia.

So, BJAuto has shares in all stages: MMSB (30%), Inokom (24%) and Bermaz (100%)

Besides, BJAuto also has 60% stake in distribution of Mazda vehicles in Philippines.

       Mazda Koeru Concept

Year 2016 will be a challenging year for automotive industry in Malaysia, mainly due to weakening of MYR and higher living cost.

BJAuto has hedged MYR/JPY at 3.10 earlier and it will expire at the end of calendar year 2015.

Now the exchange rate stands at above 3.50 level, which is 13% higher than 3.10.

So, it is not hard to predict that its profit margin will come under tremendous pressure next year.

BJAuto has decided not to increase its vehicle's price in the near future. Hopefully this can generate more volume to compensate lower margin.

For me, I will hold BJAuto's shares for long term and there is no real urgency to top up its shares at this moment.

BJAuto paid a total 14.6sen dividend in FY15 (ended Apr15 before bonus issue) including a special dividend of 3.25sen , representing about 55% dividend payout.

With plenty of cash, shareholders can expect dividend higher than its policy of at least 40%.


Malaysia's automotive duty structure for reference:

(sales tax has been replaced by GST since Apr15)

Automotive Sector & Weak Ringgit

For the past one year, MYR has depreciated almost 35% against USD (RM3.20 to RM4.30).

As a result, export-orientated stocks celebrate.

What about those import-orientated stocks?

    

Weakening of MYR is definitely not good for importers as cost of goods will be higher and profit margin will be lower.

Automotive industry selling foreign brands are one of those importers that suffer.

Even though most of the non-national cars on the road are CKD (completely knocked down) which means they are assembled locally, some of the parts are still imported.

Below are some info I get from SinChew daily last week which shows localisation rate of 3 most famous non-national car brands and their forex exposure.

• Toyota (UMW) local parts 40-50%, import 50-60% in USD
• Honda (DRBHicom) local parts 50%, import 50% in JPY
• Nissan (TChong) local parts 40-50%, import 40% in USD, 10% in JPY

As I also follow BJAuto closely, I know that about 40% of its CKD parts are sought locally and the rest should be imported from Japan in JPY.

• Mazda (BJAuto) local parts 40%, import 60% in JPY

We know that USD has strengthened a lot against MYR, so UMW & TChong who import CKD packs in USD should have a hard time.

Until two months ago, JPY still remain weak due to Japan's QE.

So those companies who import from Japan have enjoyed a good time.

This is especially true for BJAuto who still sell quite a lot of CBU cars imported from Japan last year, though more CKDs are on the way.

However, in August 2015, MYR suddenly fell a lot against USD while JPY strengthen a little against USD.

This makes MYR weaken by almost 16% against JPY (RM310 to RM360) in just about one month's time!

       MYR/JPY surge in Aug15

       MYR/JPY going toward recent high

With this kind of situation, I think BJAuto should be most affected.

Nevertheless, the good news is, BJAuto's management has hedged the currency at RM3.15/100JPY until the end of CY2015. This is just slightly higher than RM3.10/100JPY in the first quarter of 2015.

What if the JPY still stays at RM3.60 level or even higher at the end of 2015?

I think this forex issue should not be overlooked.

To what extent will the weak MYR affect automotive sector in Malaysia?

A google search found this article in bloombergtv.my, which quoted research from Maybank IB.

USD exposure

UMW ~35% COGS (cost of goods sold)

TChong ~19% COGS

Every 1% variation from RM3.60 on a full year basis will affect net profit by

• TChong 8%
• UMW 4%
• MBMR 1%

At RM4.30/USD now, MYR has weakened 20% from RM3.60 level. Does it mean that TChong's net profit can be potentially lower by 20 x 8% = 160% (loss???).

I mention "potentially" here because things are definitely not that straight forward. The RM4.30 level is not an average level on full year basis, those companies should have hedged the forex risk and are also involved in other business other than assembling & distributing vehicles etc

JPY exposure

BJAuto ~37% component cost

TChong ~5%

Perodua (MBMR/UMW) ~10%

Hino (MBMR) ~50%

Every 1% variation from RM3.03 on a full year basis will affect net profit by

• BJAuto 3%
• TChong 2%
• MBMR 2%
• UMW 1%

At RM3.60/100JPY recently, MYR has weakened about 19% against JPY from RM3.03.

So, will BJAuto's net profit be potentially lower by 19 x 3 = 57%???

BJAuto's net profit in FY15 (ends 30th Apr15) is RM219.5mil.

Another research house Kenanga reported that every 1% fluctuation from base rate RM3.05/100JPY will affect BJAuto's bottom line by 4%.

So a 18% change will affect its bottom line by 72%?? That's a lot!

Does it mean that BJAuto's annual net profit will be lower than RM100mil?

According to RHB Research, every 10sen change in MYR/100JPY will affect BJAuto's pre-tax profit by RM3-4mil.

However, I don't know the base rate RHB use for this.

If I assume the base rate to be around RM3.00/100JPY, a 60sen change (in similar scenario above) will reduce its pre-tax profit by RM18-24mil. 

This doesn't look too bad right?

In the end, I still don't know clearly to what extent weak MYR can affect automotive sector even with all these researchers' analysis.

Anyway, BJAuto's financial results should not be affected drastically until year end as the management has hedged MYR/100JPY at RM3.15 level.

CBU cars imported from Japan will be directly hit by strong JPY.

Fortunately for BJAuto, most of its popular models are already CKD which include CX-5, Mazda 3 and soon-to-follow Mazda 6.

However, recently-launched Mazda 2 Skyactiv is a CBU imported from Thailand. I think it should be traded in JPY and so its already lower profit margin will be further affected.

BT-50 pick-up truck is also imported from Thailand but it should not affect BJAuto much due to its low volume.

Other CBU from Japan include Biante, MX-5, CX-9, facelifted Mazda 6 and already phased-out Mazda 5 Skyactiv version.

All these models are not expected to generate high volume, except for Mazda 6 I guess.

As mentioned earlier, Mazda 6 will be available in CKD soon probably around end of the year.

The main problem for BJAuto is its imminent launch of CX-3 which is a mini SUV fully imported from Japan.

CX-3 should be a model that goes for volume with lower margin. So it might be affected heavily if JPY stays strong next year.

       CX-3 to rival HR-V

For BJAuto's CKD vehicles, about 60% parts are imported.

However, the import of these CKD packs is solely done by MMSB (Mazda Malaysia Sdn Bhd) in which BJAuto only owns 30% share.

BJAuto will then buy the fully assembled CKDs from MMSB for local distribution and export.

So, strong JPY should not have a direct effect on BJAuto's CKDs.

MMSB which is 70% owned by Mazda Japan will be more directly hit by strong JPY.

The question is, will MMSB still sell the CKDs cheap to BJAuto?

Automotive sector is very competitive in Malaysia. Lots of brands are doing "fire sales" to clear their inventories.

Almost for sure, BJAuto's profit margin will go under pressure from now on.

Can it still continue with its impressive growth in revenue & profit? This will very much depend on how many cars it can sell I think.

Do you think Mazda's car has the competitive edge? I think so.

Lesson From Trying To Save A Few Cents

I wrote quite a lot about BJAuto in this blog even before it was officially listed.

If you look at my portfolio and transaction history, apparently I have never bought any of its shares.

At IPO price of 70sen, BJAuto closed at RM1.82 on its debut day. This is 160% higher than its IPO price. 

The IPO price of merely 70sen gave an "illusion" that its share price was already very high at above RM1.40.

After BJAuto released its magnificent FY14Q2 result 2 weeks later, I set my target price at around RM2. So there was actually still 25% of upside at RM1.60. 

However, I still hope that its share price will drop lower, as the PE ratio used to calculate the target price was 15x.

Personally I am very optimistic about Mazda's future. Though in Malaysia it is still not on par with other established brands like Toyota, Nissan and Honda, I strongly believe that one day it will become as popular as those brands.

Besides, being unpopular now also gives it a huge potential of high growth.

I'm confident because I'm a fan of Mazda. I know how well Mazda will do with its new design and engine. I'm sure that going forward, Mazda in Malaysia and Philippines will only grow at a great pace.

I did not buy BJAuto's shares even though I know that its PE will drop sooner or later due to its high growth potential.

It turned out to be true as BJAuto keeps releasing better and better financial results, along with better market share of Mazda vehicles.

Now BJAuto's is trading at RM3.40. Those who successfully applied for its IPO and resisted the temptation to sell at more than 100% gain in the first day will gain 386% in just 10 months.

For me, I can only rue the somewhat funny decision not to buy BJAuto's shares early.

Actually I did attempt to buy BJAuto's shares, with buy order placed.

I can remember the day clearly as I was working outstation for that whole week. At that time, I only have access to internet before 9am and after 7pm.

BJAuto's share price fell quite significantly from RM2.15 to RM2.04 on 21 May 2014. I predicted that it would drop further and I decided to buy at RM2.00.

Why RM2.00? It's just because I think it is a nice number which is also a psychological support.

So I queued my buy orders at RM2.00 before the market opened on 22/5 and 23/5. They were not matched as the lowest the share price hit was RM2.02. 

On the very next week, I was about to leave for a holiday trip to China. I didn't attempt to buy BJAuto at that time because I would not be able to monitor the market for a week.

I came back from China on the 3rd of June, only to witness BJAuto's share price jumped to RM2.10 on the very next day, and it never looked back from there. As a result, my appetite to buy BJAuto also faded from there.

Why didn't I just put my buy order 2sen higher? Now I can only watch BJAuto's share price going further up to more than RM3.

Anyway, if I did not work outstation or did not go to China at that time, surely I would have already bagged BJAuto's shares at RM2.00.

This proves that I have no "fate" with BJAuto's shares.

At this stage, a few cents of difference is still important for me. I hope that one day this can be changed...

BJAuto: All Borrowings Retired

BJAuto FY14Q3 Financial Result

BJAuto (RM mil)	FY14Q3	FY14Q2	FY14Q1	FY13Q4	FY13Q3
Revenue	343.0	282.4	428.4		224.6
Assoc profit	3.3	2.6	2.1
PBT	43.5	37.5	36.2		8.0
PBT%	12.7	13.3	8.5		3.6
PAT	30.6	27.6	26.1		6.1
MAS Rev (C)	930.7	635.2
MAS OP (C)	100.3	62.4
PHI Rev (C)	123.2	75.7
PHI OP (C)	8.4	6.0
Total Equity	294.0	211.8		158.8
Total Assets	489.8	425.8		485.5
Trade Receivables	107.0	68.1		47.0
Inventories	106.7	120.8		193.8
Cash	196.2	166.5		182.0
Total Liabilities	186.1	205.1		319.4
Trade Payables	69.3	109.7		124.1
ST Borrowings	0.0	6.4		126.6
LT Borrowings	0.0	0.0		2.4
Net Cash Flow	14.1	-15.5
Operation	103.4	107.3
Investment	-3.2	-0.1
Financing	-86.1	-122.7
EPS (sen)	3.88	3.83
NAS (sen)	36.50	29.42		22.06
D/E Ratio	NC	NC		NC

(C) = cumulative result

For its latest FY14Q3, BJAuto's revenue rises 24.5% while net profit increases 10.9% compared to its preceding FY14Q2. This great result is contributed by more vehicles sales and weakening of Japanese Yen against Ringgit which favours BJAuto who imports CBU Mazda from Japan.

Besides, sales in the Philippines continue to impress and its 30%-owned associate MMSB, which is involved in CKD Mazda production in Kulim, also starts to contribute more.

So far BJAuto's 9 months accumulated net profit has reached RM84.3mil. I think it should at least post a total net profit of RM110mil for the whole FY14.

With a total paid-up shares of 806.2mil, its projected EPS will be 13.6sen.

BJAuto's share price is at RM1.86 yesterday, which means it is trading at a forward PE of 13.7x at the moment.

What should be the ideal PE for BJAuto? Since it has a good potential of growth, I'll give a PE of 15x and thus a short term target price of RM2.04.

Its peers Tan Chong and UMW are currently trading at PE of 15.3 and 19.5 respectively.

It is quite incredible that BJAuto has retired all its loans before the end of Jan 2014. Currently it has zero borrowing with RM196.2mil cash on hand.

Tan Chong & UMW both have a net gearing ratio of around 0.5.

It seems to me that BJAuto is a good company to invest in. However, it is not cheap at the moment (forward PE 13.7x).

One of the lesson I learned last year is: Do not invest in good companies, but invest in good and undervalued companies.

Should I just play the waiting game and wait patiently for BJAuto's share price to fall to "undervalued" level?

I have played this "game" on Boilermech and Freight but it looks like so far I failed miserably...

Perhaps I should also look seriously into the future growth potential...