We maintain BUY on Tan Chong Motor (TCM) with an unchanged FV of RM2.18 based on an FY20F PE of 12.0x.
Despite posting only a 1% YoY growth in revenue in 1H19, core earnings improved by a substantial 19% attributed to superior margins across all levels. This was backed by a better sales product mix and more efficient cost managements.
We are still positive on the group’s prospects for FY19 as TCM has historically registered stronger numbers in 4Q. We do not discount the possibility of a better 4Q driven by higher sales volume lifted by further price discounting to reduce its inventory levels.
With new launches from FY20 onwards, we believe that TCM will be able to maintain their margins as the group is trying to move away from the volume-based strategy. This is due to heavy competition in the local auto sector with the presence of both Japanese counterparts and also the growing local marques of Proton and Perodua.
In 1H19, TCM’s Indochina operations recorded an impressive 95% EBITDA growth after turning into the black in FY18. This was attributed to an improved sales volume across all countries; namely Laos (+31% YoY), Cambodia (+59% YoY) and Myanmar (+57% YoY). Indochina’s robust sales performance was backed by the stronger demand of the Nissan Sunny and Navara, in addition to the introduction of the all-new Nissan Terra in Vietnam.
We believe that the current valuations are relatively cheap, and that TCM’s prospects will improve in FY20 with the introduction of the all-new N18 Nissan Almera, Nissan Kicks, a B-segment crossover, and the 4th-generation Nissan Sylphy.
Risk factors for TCM include a continuing spike in inventory levels, a severe weakening of the ringgit and the worsening of its Vietnam operations.
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