Results

Above - Reported RM85.3m core earnings in 1Q13, or 26.6% of HLIB’s forecast and 27.6% of consensus.

Deviations

Higher than expected car sales (attributable to Nissan Almera) and appreciation of RM against JP¥ and US$.

Dividends

None. Maintained dividend payout policy at 25%.

Highlights

Record high quarterly revenue of RM1.4bn on the back of strong Nissan volume sales of +28.6% qoq and +82.4% yoy. Management expects 2013 sales to reach 60-65k (+72-86% yoy), attributed to Almera and Grand Livina, as well as several other new variants and new model changes (including a hybrid and electric vehicle). TCM will concentrate on B-Segment and MPV segment market.

EBITDA margin has recovered back to pre-crisis (Japan Tsunami and Thailand Flood) level of >10%, due to strong volume sales (lower operating unit cost), higher localization rate and lower import cost (strengthening of RM against JP¥ and US$). Management attributed lower CKD cost by RM17m in 1Q13 to RM appreciation. TCM has also successfully improved its forex cost ratio to US$:JP¥ to 73:27 vs. 2012’s 82:18 level.

We expect continued margin improvement as TCM increase its cost exposure to JP¥. Future CKD models are expected to have high localization contents similar to Almera at 50%.

Danang manufacturing plant commenced operation in 2Q13 and is expected to roll out its first Sunny (Almera) in June 2013. Management is expecting profitability only in 2014, when it ramp up production volume (sales volume).

Management had brush-off Segambut land development in the near term. Segambut plant is expected to support the manufacturing of UD trucks and contract assembly for Foton, Subaru and potentially other OEMs.

Guided capex of RM335m in 2013 and RM370m in 2014, mainly to expand plant capacity, land acquisitions and expanding networks (2/3S centres).

Risks

• Slowdown in the Malaysian economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

• Increased FY13-15 earnings by 7-21%, on the back of strong Nissan sales and improved margins.

Rating

BUY

• Positives –
  • Strategic expansion plan into fast growing Indochina market.
  • Increase plant utilization from contract assembly.
• Negatives –
  • Relatively underdeveloped Indochina’s automotive market.
  • Illiquid counter.

Valuation

• Upgrade to BUY with higher Target Price of RM7.30 (from RM5.55) given improved earnings outlook with higher P/E at 12x (vs. 11x) FY14, slightly below its +1-Std P/E of 12.6x.

Source: Hong Leong Investment Bank Research - 16 May 2013