Investment Highlights

• We raise Tan Chong Motor (TCM) to a BUY with an FV of RM2.19 (from RM1.76) with a higher FY19 PBV of 0.5x from 0.4x. We also raise our FY18-20 projections by 13-33% following TCM’s stellar 1H performance as we reduce operating and interest costs. Its core net profit of RM34mil exceeded expectations as it made up 68% of our forecast and 77% of consensus.

• For 2QFY18, TCM saw a net profit of RM20mil (vs. loss of RM22mil in the previous year) despite a 9% YoY drop in revenue. Put simply, the group was not selling as many cars as before but it was more profitable as margins were supported by a stronger ringgit and a better sales mix.

• Nissan sales here dropped 12% YoY in 2Q but it earned more on each car (on topline and EBITDA levels). EBITDA margin for the auto segment strengthened for the sixth consecutive quarter to 5.0%. In addition to the ringgit, margins benefited from the launch of the new Serena in May. The MPV was competitively priced and is now the cornerstone for Nissan here, taking up a third of total sales.

• For 1HFY18, TCM saw a core net profit of RM34mil (vs. a net loss of RM53mil in the previous year) on a 3% YoY drop in revenue. Similarly, Nissan sales here fell but the company earned more from each car. Auto segment EBITDA improved to 4.9% from 1.5%. In terms of markets, Malaysia still sustained the group amid continuing losses from Vietnam and a fair contribution from the rest of Indochina.

• We note that the group’s inventory and net gearing both improved to their lowest levels in at least two years. Net gearing was at 0.44x vs. its peak of 0.64x in mid-2016, as its net debt position was trimmed to RM1.2bil. Inventory has been halved across two years to RM1.04bil.

• TCM declared a 2.0 sen dividend which translates to a 79% payout for 1H18. TCM had paid up to 45% prior to making losses in FY17- 18. Its substantial capital reserve should support its expansion plans for Vietnam, and we believe TCM would refrain from relying too much on debt given its commendable work to pare down borrowings.

• Nissan should be one of the key beneficiaries of the tax holiday given the continuing popularity of the new Serena, which had only delivered half of the 4K in bookings secured as of end-June. TCM will soon add a localized version of the Urvan and a new Leaf EV to revitalize the Nissan brand here over a period of 3 years.

• We believe there is ample opportunity for TCM to launch a stronger attack given that its other key models are due for updates. This would be the key driver for earnings momentum from FY19 as the ringgit strength and buying frenzy among consumers normalize from the 4Q of this year onwards.

Source: AmInvest Research - 15 Aug 2018