- Maintain BUY on TCM at an unchanged FV of RM7.50/share. TCM’s 2Q13 results were in line with expectations. Net profit came in at RM67mil, which brought 1H13 core earnings to RM151mil. Although this accounts for 41% and 43% of our and street estimates respectvely, the 1H13 numbers has to be taken into context with the temporary weakness in 2Q13. An upcoming bumper 3Q13 earnings should more than make up for the shortfall, while 4Q13 volumes will be supported by launch of the new Grand Livina at end-Sept.

- Earnings were down by 20% QoQ on the back of a 21% decline in Nissan TIV. This is in line with industry weakness given uncertainties in car prices prior to and immediately after the general election. However, this was buffered by a stronger MYR (-11% QoQ vs. JPY, offset by c. 1% strengthening of the USD) and a higher mix of JPY denominated purchases i.e. 35:65 JPY:USD mix of imports vs. 29:71 prior to that.

- Volume weakness in 2Q13 has bottomed out, reflected by Nissan TIV of 5,222 units (+32% MoM, +62% YoY) in July. Bookings remained very strong despite the record July sales as TCM has seen bookings of 6K/month since June. Unbilled bookings as at end-July stood at close to 8K, which will spill over into Sept (as there is a one week plant closure in Aug for Raya festivities).

- The strong 3Q13 volumes will be coupled with a stronger currency. MYR strengthened further by 7.3% vs. JPY and by 0.4% vs. USD in 2Q13 (to be reflected in 3Q13 earnings given a 3-month forward hedging). Its 3Q to-date forex exposure stood at 68:32 USD:JPY. The increase in JPY exposure is mainly due to the Serena hybrid which is imported as CBU from Japan.

- TCM’s contract manufacturing deal with Mitsubishi involves initial volumes of 4K-5K units (for one SUV model) and is expected to commence in early FY14F. At this rate, we estimate FY14F incremental earnings of RM4-5mil (based on assembly charge of RM6K-7K/car).

- TCM’s Shah Alam plant is likely to be used for the Mitsubishi contract assembly. The deal will likely involve TCM buying over basic production lines from Proton’s Shah Alam plant and we would not rule out TCM acquiring staff from Proton as well, as part of the deal.

- Key catalysts include:- (1) launch of new Grand Livina at end- Sept 13; (2) launch of A/B segment models in FY14F; (3) TIV recovery in 2H13; (3) stronger than expected Serena Hybrid sales – bookings have reached 1.9K after a month of launch versus FY13 target of 2K.; and (4) potential M&As. However, the strength of the USD (accounts for 62% of imports) is a key risk. TCM has locked in favourable rates up to Oct 13, but FY14F is subject to downside risk should the MYR weakness against USD persist. Our in-house economist’s projections puts USD:MYR average rates unchanged at 3.1 over FY13-14F.

Source: AmeSecurities