While other sectors such as logistics and technology are gaining much more attention, sectors such as automotive which are cyclic in nature and due to economic concerns have been impacted - are quietly being ignored by the larger majority. So is Bermaz a good investment now? If not, when?

This is our take. 

Overview

Bermaz Auto business is principally involved in the distribution and retailing of Mazda cars as well as after-sales services for Mazda cars in both Malaysia and Philippines. It also partially owns the local assembly arm of Mazda cars in Malaysia as a joint partnership with Mazda Japan who are the main owners of his local assembly entity. The most recent contractual agreement that allows Bermaz Auto to distribute Mazda cars is valid till 31st March 2019 - an agreement that has been extended multiple times since the initial rights were awarded to Bermaz. 

Industry Forecast

​When we talk about auto industry forecast, we need to look at the big picture. And what we believe will drive the demand will be the growing middle class and their transportation needs. 

Both Malaysia and Philippines are growing economies and from an infrastructure perspective, is yet to be fully developed or efficient enough to totally dismiss cars as a transportation option. Especially due to the size of these countries, they will never be as efficient on current technology available whereby they can reduce dependencies on cars as transport. Add to this, in Asian culture, cars are a symbol of success - it is one of the top 3 things besides home and family care where disposable income will be spent. So unless something dramatic changes, it will continue to be desired.

Based on economic projections, Malaysia's PPP levels are slated to hit $30160 in the next 5 years. If we compare that with current levels of car ownerships in countries which have similar PPP levels, they indicate growth in car ownership with Czech Republic and Slovenia showing higher levels of ownership and Slovakia similar to current Malaysia levels. 

In the case of the Philippines which is projected to hit PPP of $7875 you get a much better industry growth story as their ownership levels are in-line to double should they achieve their growth levels. 

Of course this doesn't account for other dynamics such as ownership costs, cost of living and pay equality, but purely from a big picture perspective, there looks to be organic growth. Hard to believe in such a matured industry. 

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Business Focus

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Looking at Bermaz and their business, we need to look at the Mazda business. And their business is cars. When we talk about cars, customers look at their product range, desirability, after sales services, reliability, cost of the car, cost of running it and a multitude of other smaller aspects before a purchases.

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But all these actually affect one metric. One metric that can help you evaluate how their customers are valuing all these aspects and in a way determining how good this business is. All these are covered by brand value.

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Any positives or negatives about a product will be reflected in the brand value of a company and for Mazda's case, it makes a great one. Based on a report by Interbrand - in 2016, Mazda had the second largest brand value increase of all Japan companies.

Overall it is the 13th most valuable brand in Japan but way behind big boys - Toyota (1st) and Honda(2nd). But this isn't really of concern, primarily because we don't foresee Mazda being a significant threat to Toyota or Honda anytime soon. However challenging the likes of Nissan (5th), Lexus (9th) and Subaru(12th) as the third most preferred car brand from Japan is a distinct possibility based on recent performances. In fact, the market share of Mazda has been growing in Malaysia although they are still in the low single digit. Nevertheless, their popularity continues to grow. 

So with this and adding to the fact they are already a top 20 company in Japan, they have a very solid business model going forward.

Final Thoughts and Value

Bermaz Auto has a great brand underpinning its business. The business model is clear and in a generally matured industry.The private automotive industry has been around since Ford came along and a lot of the risks involved in making an investment in this space is clear from both a global as well as locally in terms of laws, financing, culture and governmental protection.

Of course we now live in a world of disruption and for the automotive industry, no different. Global competition and the likes of electric car makers do pose a problem for existing players especially Japanese companies who culturally value tradition and history very highly. Its yet to be seen if they can evolve effectively to meet these challenges. Near term, there is also the softer automotive market to deal with as well. 

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However overall for Bermaz, we like the brand value, how much it has grown and how much it can continue to. We like the industry prospects and the markets they are in. We like the fact that Bermaz has thus far shown their ability to run distributorship through very efficient financial ratios. Finally, we also like the fact we understand a lot about the risks in investing in the automotive industry.  

​In terms of timing, it might not be the best time to invest in this space considering the fact that based on our projections it will likely be at best a slightly weaker year in 2017. However, over the long-run, there is great value in Bermaz and Mazda and based on financial projections, a very profitable investment to add to a portfolio.

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Disclaimer : This is only the view of the author and not a solicitation to buy or sell an equity. You are advised to make your own judgement before making any investments.