Investment Highlights

• We maintain our BUY call on Tan Chong Motor (TCM) but reduce our FV to RM2.18 (from RM2.47 previously) based on an FY20F PE of 12.0x.

• We have trimmed TCM’s FY19/20 core net profit by 12.4/11.4% to account for the softer ringgit. Our FY19–20F USD/MYR assumption has been revised from RM4.12 to RM4.16, which is 1–2% lower than our base case of MYR4.08–4.10. This is to reflect the recent weakness of the ringgit which is expected to impact the group’s earnings in the coming quarters.

• Key points from our meeting with the group’s management on Wednesday:

1. New launches in FY19 and FY20. TCM reaffirmed that there will be new launches in 2019 and 2020. The Nissan Leaf, the world renowned electric vehicle, will be launched in 2HFY19. The group emphasized that this will not be a model to focus on for growth of sales volume as it will be catering to a niche market. The updated Nissan Leaf will be a CBU model that will be able to travel at an improved distance of 360–400km vs. ~160km for the previous model. The group also guided that it is planning to introduce 3 new models for FY20. These will be the all-new N18 Nissan Almera, followed by the Nissan Kicks B-segment crossover and the 4thgeneration Nissan Sylphy. However, it is still uncertain if these are CKD models as well as the timelines for the launches. We maintain our sales growth projection of 3.0% in FY20 premised on the continuing strength in the sales of the Serena S-Hybrid MPV, and the potential introduction of these new models.

2. Continued efforts to pare down inventory. The group guided that the inventory level spiked to RM1.5bil in 1Q19 due to the stock-up of CKD parts for the new Nissan X-Trail facelift. Recall that the updated model was launched in mid-April. We expect a reduction in the group’s inventory level from next quarter onwards with the assembly and delivery of the Nissan X-Trail facelift which comes with a five-year unlimited mileage warranty programme. However, the group’s target to pare down its inventory level to RM700–800mil in the next few quarters may look challenging. This is in view of the fact that Nissan X-Trail facelift has to compete against major SUV titans such as the Mazda CX-5 and the Proton X70.

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

Source: AmInvest Research - 16 May 2019