Investment Highlights

• We maintain HOLD on Tan Chong Motor (TCM) with a higher FV of RM1.76/share based on an FY19 PBV of 0.4x (from an FV of RM1.30/share on PBV of 0.3x). The PBV is above its 3-year average of 0.3x and 1-year average of 0.39x.

• TCM returned to the black after two years of net losses with a core net profit of RM14.1mil. EIs mainly comprise a foreign exchange loss of RM12.5mil and gain on derivatives of RM5.7mil.

• The result exceeded expectations, going above our FY projection of RM12.4mil and consensus RM16.6mil.

• We point the better performance to two main factors: (1) a higher EBITDA for its Malaysian operations, which benefited from a stronger ringgit amid a continuing decline in Nissan sales; (2) a slight decrease in its net finance costs as gearing was reduced to its lowest level in two years.

• We raised our FY18-20 projections by 2.9x-4.09x on the assumption of a stronger ringgit (3.92 for 2018, 3.84 for 2019) and better management of its operating and interest expenses.

• While a return to profit is encouraging, we remain cautious given the key risks of: (1) slow Nissan sales (which now struggle to breach the 2K/month level vs. ~4K/month historically). The recent Serena Hybrid MPV launch provides a small reprieve but TCM requires volume-oriented launches that could come late this year or in FY19; (2) inventory remains high at RM1.1bil and the process of selling the older models at a steep discount could dent margins.

• TCM provided a broad view of its Indochina operations with an earnings breakdown by geographical segment for the first time. Indochina provided solid support for the topline (accounting for 19% of 1Q18 revenue), it remains a drag on the bottom line on Vietnam’s losses from poor utilization rates. TCM last guided that its Vietnam operation was in the red while the other Indochina operations (Cambodia, Laos and Myanmar) were at least at breakeven.

• TCM did not declare a dividend. We impute a conservative payout assumption of 10-20% for the coming years (vs. 40% paid out in sunnier times) as TCM charts a slow path to recovery and retains cash for its expansion plans (the King Long bus project in Vietnam and the auto hub in Bagan Datuk).

Source: AmInvest Research - 21 May 2018