Investment Highlights

• We maintain BUY on Tan Chong Motor (TCM) with an FV of RM2.34/share based on an unchanged FY19F PE of 13.0x.

• Key points from the group’s analyst briefing on Tuesday:

1) New launches may come from this year but TCM remains tight-lipped on the models. TCM reaffirmed that there may be launches in 2019 and 2020. With that, we maintain our sales growth projections of 5.0%/3.0% in FY19/FY20 premised on the continuing strength in the sales of the Serena S-Hybrid MPV, in addition to the potential introduction of new models. Key models ripe for an upgrade include the Almera, Teana, Grand Livina, XTrail and Navara.

2) Continued efforts to strengthen balance sheet. TCM’s inventory level tipped upwards at the end of FY18 due to the group’s purchases ahead for the Chinese New Year period. The group targets to lower inventory to below RM800mil from RM1.2bil within the next few quarters. Furthermore, TCM also intends to continue to cut its net gearing with the repayment of their term loans and bills, which would result in lower interest costs. We believe this should be achievable given the group’s determination to lower net gearing levels for the past two years.

3) Staying focused on margins and sales mix, instead of volume. Seeing that its business strategy has been working out so far, the group will continue to focus on the sales on margin-oriented vehicles in less crowded segments. The recently announced FY18 results exceeded expectations and were largely backed by the favourable USD/MYR exchange rate seen when purchases were made in the first half of the year. However, we expect margins to normalize from the exceptional 4Q while the group will continue to do its best on fortifying its position by hedging when appropriate.

• We retain a BUY on TCM based on the prospect of new models from this year to further fortify margins and rebuild the Nissan brand. A stronger balance sheet would contribute to better margins. Risk factors include a spike in inventory levels, a severe weakening of the ringgit and weakening of its Indochina operations.

Source: AmInvest Research - 27 Feb 2019