Investment Highlights

• We maintain our BUY recommendation on Tan Chong Motor (TCM) but increase our FV to RM2.47 based on a rolled over FY20F PE of 12.0x.

• TCM’s 1Q19 core net profit of RM22.1mil was broadly inline with our expectations, which accounted for 19.0% and 20.0% of our and consensus estimate respectively. On a YoY basis, the group’s earnings rose significantly by 56.0% compared with 1Q18’s RM14.1mil.

• Since FY17, the group has been recording softer earnings in its 1Q results. We believe that this was due to the shorter working month and holiday season in February. We are leaving our estimates unchanged as earnings are likely to improve in the quarters ahead of FY19.

• The group’s automotive division recorded a higher revenue of RM1.06bil (+4.7% YoY) and an EBITDA of RM69.2mil (+43.6% YoY). The stronger performance was contributed by better sales product mix from the newer models launched in the local and overseas markets. Supporting this was the spectacular sales of the Serena SHybrid MPV, which TCM delivered a total of 1.5K units in 1Q19 vs. 0.9K units in 1Q18.

• 1Q19 witnessed a significant improvement in the group’s IndoChina operations, which recorded a new high in revenue and EBITDA of RM101.5 million (+27% QoQ and +111% YoY) and RM7.0 million (+87% QoQ and +98% YoY) respectively.

• However, the key concerns are: (1) the group’s inventory level at RM1.5bil. This is the second consecutive increase in its inventory level despite the group’s plan to lower it to less than RM800mil; and (2) a rise in its net gearing ratio to 0.39x in 1Q19 from 0.31x in 4Q18.

• No dividends have been declared in the quarter. We have imputed a conservative payout assumption of 30% for FY19. This translates into a 3.3% dividend yield which we deem as decent.

• We believe TCM will continue to do well going forward based on the strong Nissan sales, prospects of new models to further fortify its margins and rebuild the Nissan brand. Risk factors include a continuing spike in inventory levels, a severe weakening of the ringgit and worsening of its IndoChina operations.

Source: AmInvest Research - 15 May 2019