Investment Highlights

• We maintain BUY on Tan Chong Motor (TCM) with an unchanged FV of RM2.18 based on an FY20F PE of 12.0x.

• TCM’s 1H19 core net profit accounted for 40% and 41% of our and consensus estimates respectively which we deem as within expectations. We expect a stronger 4Q driven by higher sales volume lifted by further price discounting to reduce its inventory levels. On a YoY basis, the group’s 1H19 core earnings rose by 19% to RM40.8mil compared with 1H18’s RM34.3mil.

• Comparing against 1H18, we see an improvement of efficiency margins across all levels for TCM in 1H19, ultimately leading to a core net profit margin of 1.9%.

• TCM’s automotive division posted a flat revenue growth of 1% to RM2.1bil for 1H19. This was despite a 47% YoY growth in EBITDA to RM149.6mil attributed to better sales products mix arising from new models that were launched in the Malaysian and overseas markets. The division’s 1H19 EBITDA margin improved 7.1% vs. 4.9% in 1H18.

• We note that the sales of the Serena S-Hybrid are starting to taper off after a decent start in 1Q19. TCM delivered a lower volume of the model in 1H19 of 2.7K compared with 2.9K in 1H18. The passenger vehicles and MPV sub-segment contributed more than half of Nissan vehicle’s sales composition at 54% of the total sales in 1H19.

• We witness yet another deterioration of the group’s Vietnam operations for a second consecutive quarter. From barely breaking even in 1Q19, its Vietnam operations losses widened to RM9.4mil from RM0.1mil. However, the losses from TCM’s Vietnam operations were as partially cushioned by its IndoChina business where it recorded a 95% YoY growth for 1H19 to RM14.9mil from RM7.6mil in 1H18.

• We are mindful of several key concerns about the group: (i) the spike in TCM’s inventory levels for a second consecutive quarter to RM1.5bil; and (ii) an increase in its net gearing to 0.42x from 0.39x in 1Q19 which we believe was due to an increase in borrowings to fund its higher inventory.

• A dividend of 2.0 sen was declared in the quarter, translating into a 1H19 payout ratio of 37% and a dividend yield of 1.4%. We maintain our conservative payout assumption of 30% for TCM for FY19, which translates into a 3.3% dividend yield which we deem as decent.

• We believe TCM’s prospects will improve in FY20 with the introduction of the all-new N18 Nissan Almera, Nissan Kicks B-segment crossover and the 4th-generation Nissan Sylphy. Risk factors include a continuing spike in inventory levels, a severe weakening of the ringgit and the worsening of its Vietnam operations.

Source: AmInvest Research - 21 Aug 2019