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This article first appeared in The Edge Malaysia Weekly on September 18, 2017 - September 24, 2017

MERCEDES-Benz Malaysia Sdn Bhd (MBM), the brand custodian and distributor for Mercedes-Benz in Malaysia, achieved an all-time record vehicle sales last year, but Cycle & Carriage Bintang Bhd (CCB), the German premium marque’s largest dealer, has little reason to celebrate.

Before addressing the issues in greater detail, let’s start with the bottom line.

CCB’s net profit fell 25% year on year to RM39.1 million in its financial year ended Dec 31, 2016 (FY2016), mainly due to changes in sales mix in favour of lower-priced and lower-margin vehicles, especially the C-Class, which faced pressure on margin in a highly-competitive segment.

To put things in perspective, CCB, unlike its peers, is not just a main dealer for Mercedes-Benz. It also holds a 49% stake in MBM, which gives it exposure to the wholesale distribution of the marque in the country. MBM’s parent company — Daimler AG — controls the remaining 51% stake (see diagram).

Being a shareholder of MBM, CCB is entitled to dividend income — amounting RM11.23 million in FY2015 and FY2016 — on top of deriving earnings from its trading operations for retailing and after-sales service of Mercedes-Benz vehicles.

Unfortunately, while MBM delivered record-breaking performance last year, it has not translated into an impressive jump in CCB’s earnings nor has it lifted its share price in the last 20 months.

Year to date, CCB’s share price has dropped 25%. It closed at RM2.25 last Thursday, giving the company a market capitalisation of RM227 million. The counter already was down 12% last year.

It is worth noting that CCB is 59.1%-controlled by Singapore-listed Jardine Cycle & Carriage Ltd, which is part of the sprawling empire of British family-owned Asian conglomerate Jardine Matheson Holdings Ltd.

At the current level, CCB, a pure automotive play on Bursa Malaysia, is trading at a trailing 12-month price-earnings ratio (TTM PER) of 11.8 times.

In comparison, Jardine Cycle & Carriage fetches a TTM PER of 15 times; Jardine Matheson, 6.5 times; and Germany-listed Daimler, seven times.

It may not be an apple-to-apple comparison but Hap Seng Consolidated Bhd is trading at a TTM PER of 21.2 times. The diversified group owns Hap Seng Star Sdn Bhd, another major dealer for Mercedes-Benz, hence making it CCB’s closest rival.

Hap Seng’s automotive segment accounts for 21% of the group’s revenue, but contributes only 3% to its operating profit. Nonetheless, the group has other core businesses, like plantations, property development and financial services, contributing to a large bulk of its earnings.

 

Problems facing CCB

A foreign fund manager highlights that the biggest problem for CCB is its increased inventory level due to a lengthening turnover period, coupled with a fast depreciation of about 1.5% a month.

That, he says, perhaps explains why CCB is not that appealing to the investing community.

In a brief email reply to The Edge, CCB chairman Haslam Preeston acknowledges that the group “experienced intense trading competition” within the Mercedes-Benz network and the premium segment in the first half of 2017 (1HFY2017), which led to a “considerable fall in margins”.

The overall net profit of RM9.3 million in 1HFY2017 was 68% lower y-o-y as margins were affected by strong competition in the premium car market.

MBM posted an all-time record sales of 11,779 units last year, up 9% from 2015.

Meanwhile, CCB, which operates 12 outlets nationwide, sold more than 4,800 Mercedes-Benz motor vehicles, also a record high.

However, a search on the Companies Commission of Malaysia’s website shows that despite MBM’s 3% y-o-y increase in revenue to RM3.844 billion last year, its net profit declined 38% y-o-y to RM346.74 million. That essentially means that MBM’s net margin shrank from 15% in 2015 to 9% in 2016 as the increase in sales volume was mainly for lower-priced models.

Likewise, CCB’s net margin fell to 2.6% in FY2016 from 3.3% previously.

So, what can CCB do to improve?

A shareholder of CCB, who is visibly upset, wonders why the group did not cling on to its dominant position and leverage its relationship with MBM to improve its financial performance.

He opines that MBM has created a monster for CCB by allowing the likes of Hap Seng Star and Naza Group’s NZ Wheels Sdn Bhd to share the pie.

“The initial intention was to create healthy competition between CCB and Hap Seng Star, so that they would fight for sales aggressively. But today, Hap Seng Star has become a strong rival and affected CCB’s performance,” he says.

The shareholder finds the current situation “very frustrating”, considering CCB has a substantial stake in MBM and the former should have done more to protect its shareholders’ interest.

“As a shareholder of CCB, I feel like I have been treated unfairly. The company needs to buckle up and try to revamp its business model. Bear in mind that CCB has a stake in MBM. It should have an advantage over other dealers, not underperform,” he says.

Most people, however, do not share the same view.

“It is easier said than done. CCB is not in the driver’s seat of MBM, which determines the price and profit margin [of each model]. CCB can still make some money, but it is nothing compared with what MBM is making,” says a director of an automotive firm who prefers to remain anonymous.

“It is what it is. CCB is only an equity partner; it has no big say in MBM with regard to how the business is run. The only thing CCB can do is to improve its showrooms and provide better customer service [to be a better dealer],” he says.

A car industry veteran concurs.

“From MBM’s point of view, the brand is growing, so competition among the dealers is good. CCB has no management control in MBM. That’s how it works and I don’t think this will change. The only advantage it has is that for every dollar MBM makes, CCB gets 49 cents,” he says.

 

Entry of Swire Group

It is worth noting that two weeks ago, MBM announced the addition of Auto Commerz Sdn Bhd to its list of authorised dealer partners.

Interestingly, Auto Commerz is an international dealer backed by the Swire Group, a diversified global conglomerate that has experience in the retail and distribution of Mercedes-Benz vehicles in Taiwan, and will now also be catering for customers in the northeast region of Kuala Lumpur.

Automotive industry experts are of the view that MBM is bringing in Swire Group to put pressure on CCB and even Hap Seng Star in an already competitive market.

“With a new dealer coming in, CCB’s market share is likely to be diluted further because customers will have more choices and competition will get stiffer,” says the industry veteran.

Meanwhile, the director of an automotive firm says MBM’s strategy is to diversify its dealership, ensuring that it will not be held to ransom by just one or two major dealers that dominate the market.

“It’s very normal worldwide. Car manufacturers want their dealers to compete among themselves and see who can survive the longest. That’s why MBM wants to put more pressure on CCB,” he says.

Now, if anyone is wondering why shareholders of CCB still refuse to give up on the group, perhaps its 49% stake in MBM is the answer.

“CCB’s stake in MBM is worth a lot of money, and Daimler will eventually want to take it back,” says a minority shareholder who plans to hang on to his CCB shares.

As at Dec 31, 2016, MBM’s net assets stood at RM777.8 million. A back-of-the-envelope calculation shows that should CCB dispose of its stake in MBM, it could get RM381.1 million, representing more than 1.5 times of its current market capitalistion of RM227 million, based on last Thursday’s closing price of RM2.25.

 

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