- We raise Tan Chong to HOLD from SELL and increase our fair value to RM3.40/share (from RM3.20/share previously) after a recent company visit and a 37% fall in share price since our downgrade. We have fallen back to a book value-based valuation and now value Tan Chong at its mean PBV of 0.8x given expectations of still depressed earnings over the next 12 months.

 - We slash Tan Chong’s FY14F/15F/16F earnings by 9%/40%/3% to reflect:- (1) lower TIV estimates as Nissan’s FY14 TIV disappointed; and (2) higher USD assumption of 3.40 (from 3.25) for FY15F. Our revised FY14F/15F/16F earnings are 51%/57%/42% below consensus. EBIT margins are expected to fall to 3% (for FY15F) from 3.5% (FY14) and 6%-8% over FY11-FY12.

 - After heavy discounting and market share loss in FY14F, FY15F poses a new challenge in the significant strengthening of the USD. Further compounding the situation are:- (1) TCM halting kit purchases prior to the USD uptrend to manage inventories and only re-ordering at elevated USD levels; and (2) earnings now being more sensitive to USD volatility given the depressed underlying margins. Every 1% rise in USD impacts FY15F earnings by 16%.

 - On a positive note, the launch of the new X-Trail and Almera facelift should rejuvenate sales from the lows in FY14F. We forecast Nissan TIV to recover 4% to 48,315 this year, at the higher end of management’s target of 47K-48K. The X-Trail has garnered 2,000 bookings (vs. management’s expectation of 400-500 monthly sales), while the Almera’s bookings currently stand at 2,400 (vs. average monthly sales of 1,864 in 10M14).

 - A price hike is being implemented by industry players as a reaction to the USD strength. For Nissan, the Almera’s pricing is increased by RM2,000 (+3% on average), but it is too early to gauge the implication on demand.

 - Tan Chong’s restructuring will place it on a stronger footing to get through the slowdown. The group is undertaking:- (1) balance sheet lightening via asset spin-off to improve net gearing to 15% from 47% currently; (2) the reduction of inventories to RM1.2bil in 4Q14 (2Q14/3Q14: RM1.7bil/RM1.6bil); and (3) refinancing borrowings over an average 7-year term in late-FY14.

 - From a valuation standpoint, FY15F PBV of 0.7x is close to the trough of 0.5x seen in FY07. However, the stock lacks catalyst amid sustained depressed earnings.

Source: AmeSecurities