- Tan Chong’s 3Q14 results were in line with our estimates but well below consensus – accounting for 73% and 39% on full-year estimates, respectively.

- The group reported core net profit of RM13mil (excluding a USD4.6mil/RM15mil provision for NVL’s ageing stocks), which brought 9M14 core earnings to RM67mil.

- Earnings recovered by 6% QoQ in line with a 6% rise in revenue. However, this is still well below normal earnings run rate of RM40mil–70mil/quarter given the still weak volumes. Nissan TIV was down 22% YoY in 3Q14 and -18% YTD. Core operating margins were still depressed at ~3% vs. the previous run-rate of 6%-7%.

- We expect competition to be exceptionally aggressive in 4Q14 as players rush to clear inventories ahead of uncertainties in 1H15. The B-segment in particular, is a segment vulnerable to this competitive environment. As such, despite potentially stronger volumes in 4Q14, margins could take a further hit.

- Earnings revision cycle is still on a downward trend – we expect a sharp revision in consensus earnings after the poor 3Q14 results. Our forecasts are 47%/29%/39% (FY14F/15F/16F) below current consensus estimates.

- Compounding the situation further is the strengthening USD which will impact earnings from 4Q14 onwards. Circa 70% of Tan Chong’s imports are denominated in USD.

- Given the depressed margins, bottomline is now more sensitive to forex. Every 1% change in USD impacts FY15F earnings by 9%, on our estimates. Our forecast models in USD:MYR at 3.25 vs. spot rate of 3.3.

- We re-affirm our SELL rating on Tan Chong at unchanged fair value of RM3.20/share. Even at an 81% FY15F EPS growth, valuations are stretched at 17x FY15F PE. Earnings need to play catch up meaningfully before a re-rating can be expected.

Source: AmeSecurities