Investment Highlights

• We maintain a BUY and FV of RM2.19/share on Tan Chong Motor (TCM) based on an FY19 PBV of 0.5x.

• Key points from the group’s analyst briefing on Friday:

1) Margins and dividends are the priorities now, rather than volume. The stronger ringgit and a better sales mix have fortified margins and allowed TCM to stay afloat despite selling fewer cars than before. TCM has pivoted into more niche opportunities and has switched away from competing for volume at the expense of its margins. It resolved to paying dividends at the payout ratios seen prior to its loss-making years (37%-45%). We see a fair dividend yield of 2.7% to 2.9% for FY19 and FY20 respectively based on a payout projection of 40%.

2) Serena will anchor sales in coming months. TCM has secured over 4K in bookings since the model was launched in May and monthly MPV sales of ~850 units should account for at least a fifth of total Nissan sales moving forward.

3) New launches to come in 2019 but still tight-lipped on the models. TCM emphasized that these would be CKD and it would save these “silver bullets” for when sales start to dip visibly. Key models ripe for an upgrade include the Almera, Grand Livina, X-Trail and Navara. TCM had some additions this year (the Serena S-Hybrid, a variant of the Navara, a localized Urvan and the upcoming Leaf) after a two-year absence. Note than the Nissan Terra (a 7-seater SUV adapted from the Navara pick-up truck; the Navara pick-up here is a CBU imported from Thailand) was introduced in a number of regional markets (Thailand, Indonesia and the Philippines). This model has not been targeted for Malaysia and we reckon a CBU version (which could retail upwards of RM160K) would be a tough sell given the competition from cheaper and locally-assembled alternatives from the likes of Honda and Mazda.

4) It aims to further improve inventory and net gearing. Recall that TCM has trimmed both items to their lowest levels in at least two years. It targets to lower inventory to below RM1bil from RM1.04bil at end-June. We believe this should be achievable given the group’s determination to leverage the tax holiday to push not only its recentlylaunched Serena but its other key models. TCM also intends to eventually lower its gearing to below 33% from 39% currently with the repayment of a RM250mil bond due in Nov 2019.

5) Plans to raise Indochina operations. TCM is still anchored to its local operations as Vietnam remains in the red and the contribution from its other Indochina markets (Laos, Cambodia and Myanmar) is relatively tiny. Vietnam has been adversely impacted by a low utilization rate at its Danang plant and a tightening on car imports by the local government from early this year. To address this, TCM is considering more CKD models (to add to the X-Trail pick-up and Sunny sedan assembled there) and using the plant for contract manufacturing. These options are still being evaluated and a more concrete plan could come next year.

Source: AmInvest Research - 20 Aug 2018