Investment Highlights

• We maintain BUY on Tan Chong Motor (TCM) with a lower FV of RM1.56 (from RM2.18) based on an unchanged FY20F PE of 12.0x.

• We trim TCM’s FY19/20/21 core net profit forecast by 34%/29%/24% after factoring in higher depreciation estimates.

• TCM’s 9M19 core net profit of RM47.7mil was below expectations, accounting for 47% and 55% of our and consensus estimates respectively. On a cumulative basis, the group’s 9M19 core earnings dropped 31% YoY from 9M18’s RM69.2mil. This was partly attributed to a decline in its 9M19 revenue to RM3.2bil (-13% YoY) compared to RM3.7bil in 9M18.

• Nissan sold a total of 15.7K units in 9M19 vs. 20.7K units in 9M18 (-24% YoY).

• TCM registered a 3Q19 core net profit of a measly RM6.1mil (-69% MoM, -83% YoY). This was due to the additional recognition of RM21.4mil of depreciation charges under the MFRS 16. Depreciation for the quarter was RM42.5mil, leading to a heightened 9M19 depreciation expense of RM102.9mil (+43% YoY).

• TCM’s automotive division posted a depressed revenue of RM3.1bil (-13% YoY) for 9M19 due to a high base from 2018’s tax holidays. However, EBITDA for the division improved significantly to RM215.6mil (+13% YoY) from RM190.5mil due to cost rationalization. The division’s 9M19 EBITDA margin rose to 6.9% vs. 5.3% in 9M18.

• TCM’s Vietnam operations were in the red for the third consecutive quarter, expanding its LBITDA to RM17.9mil in 9M19. On the bright side, the losses from TCM’s Vietnam operations were partially mitigated by its improved Indochina business where it recorded an impressive 146% YoY growth in EBITDA to RM20.4mil in 9M19 from RM8.3mil in 9M18.

• TCM’s inventory levels were still at a concerning level of RM1.5bil and we believe that this was contributed by the group’s inability to clear off the X-trail SUV due its lack of competitiveness in both pricing and features compared to the more popular Proton X70 and Honda CR-V.

• The group’s balance sheet recorded a slight increase in net gearing ratio of 0.43x from 0.42x in 2Q19.

Source: AmInvest Research - 27 Nov 2019