Investment Highlights

• The media reported that Japanese prosecutors have indicted Carlos Ghosn, the former chairman of Nissan Motor, for under-reporting his income for the five years to March 2015. Ghosn and former Nissan director Greg Kelly were said to have worked together to under-report Ghosn’s income by 5 billion yen. According to The Wall Street Journal, prosecutors also accused Ghosn of underreporting his income by another 4 billion yen for the three years to March 2018.

• Ghosn is largely credited with the turnaround for Nissan and Renault. He was removed as the chairman of Nissan and Mitsubishi last week, and had an interim official to replace his roles in Renault. He had served as the chief executive of Nissan for 16 years until he was succeeded by Hiroto Saikawa in April 2017. The Renault-Nissan-Mitsubishi partnership is recognized as an alliance (for cost synergies and joint R&D initiatives) with Nissan owning 15% of Renault, and Renault owning 43.4% of Nissan. Nissan owns 34% of Mitsubishi Motors.

• The media reported two other major aspects of the story. Firstly, Ghosn was said to have been planning a full merger of Renault and Nissan, according to the Financial Times in late November. This plan was said to be strongly opposed by Nissan, which was said to perceive the existing alliance as an unequal arrangement. Renault’s 43% in Nissan came with the control of appointing senior leaders in the company, while Nissan’s 15% in Renault was accompanied with no voting rights or say over the latter’s operations. Secondly, The Wall Street Journal reported a couple weeks later that Ghosn had planned to remove Nissan’s existing CEO Hiroto Saikawa due to the latter’s management of issues such as the numerous recalls in Japan and declining sales in the US. It is uncertain whether the plan to remove Saikawa was related to Nissan’s opposition to the plan to fully merge Nissan and Renault.

• We note three key points:

1) We believe there is a risk of conflating a legal issue with an operational one. The allegation faced by Ghosn may take weeks or months to be resolved in court. With Ghosn removed from the alliance, it is up to the companies in the alliance to reckon with the operational issues and internal tensions that are present. For Nissan, the continued product recalls in its home market could be a risk to its brand value: Nissan recently said it would recall 150K cars in Japan due to incorrect vehicle inspections in its local plant, only a year after it had to recall 1.2mil cars due to a similar issue. We believe Nissan has so far taken the correct approach by taking accountability and taking immediate steps (product recalls and the suspension of its factories). This differs from the case of Volkswagen, which was caught following tip-offs to external parties and subsequently investigated in numerous countries. The issue was subsequently seen as a symptom of the company culture rather than limited to a quantifiable number of cars.

2) We believe it is unlikely that the near two-decade-old alliance would be unraveled but Ghosn’s exit could force a review of the alliance to address the concerns of inequality from Nissan. The removal of Ghosn — who was seen to consolidate power as the de facto leader of the alliance — could see the companies foster a more collaborative relationship that is not anchored to a single individual. The key point of contention could be the companies’ power to determine Nissan’s leadership: the alliance allows Nissan and Renault to each name five board members with the CEO to be decided by Renault and the deputy CEO by Nissan. Renault and Nissan said they were “fully committed” to the alliance and resolved to maintain the cross-shareholding arrangement of the alliance in end-November. The two companies last saved €5.7 billion in 2017 from the measures to cut costs with shared factories and joint purchasing power and target to raise this number to €10 billion by 2022.

3) The strategy for Nissan remains unchanged for now. This was also emphasized by Tan Chong Motor (TCM) in its last analyst briefing. We retain a BUY and FV of RM2.10 for TCM premised on the ongoing recovery of Nissan sales here, and the prospect of new models in 2019 to strengthen margins and reinvigorate the Nissan brand in Malaysia.

Source: AmInvest Research - 12 Dec 2018