• 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.

Source: AmInvest Research - 22 Aug 2019