Investment Highlights

• We maintain BUY with an unchanged FV of RM2.10/share based on an FY19F PE of 13.0x.

• Key points from the analyst briefing on Wednesday:

1.  Future launches will retain the priority on margins rather than volume. TCM is still tight-lipped on the models slated for 2019 but emphasized it would follow the new approach of finding segments that are less crowded, target consumers that are less price sensitive and with better access to financing. It had relied on the Almera, X-Trail and Navara for over half of its volume in the past. The A & B segments for passenger cars such as the Almera have only seen competition intensify with shorter model cycles and new launches that fail to capture the price premium that they used to. For TCM, a pivot away from this has been vital for its turnaround.
2.  Inventory control still on its mind. TCM intends to further trim its inventory to RM500-600mil after finally cutting it down to below RM1bil in the recent quarter. We believe TCM had been overstocked in the past due to excessive sales targets and commitments to its principle. Management said the bloated inventory of mostly aging cars necessitated various rebates and discounts, consequently hitting margins and keeping it in the red for two years.
3.  Continued profitability is a goal for Vietnam. Recall that this past quarter saw its bottom line lifted as Vietnam was EBITDA-positive for the first time. Sales volume there had spiked (up 279% QoQ / 108% YoY) as the group successfully passed a shipment of CBU Navara through the tighter restrictions imposed on car imports from this year. Vietnam also benefited from a small pivot by customers towards CKD models such as TCM’s X-Trail and Almera. This raised the utilization for its Danang factory to 50% from the usual 40%. Management said it was still learning to navigate the demands of Decree 116 and could not ascertain if it would be able to sustain the volume and profitability in Vietnam.

• We retain a BUY on TCM based on the ongoing recovery of Nissan sales here, the prospect of new models in 2019 to strengthen margins and reinvigorate the Nissan brand, and its rising momentum after years of losses.

Source: AmInvest Research - 29 Nov 2018