Results

Reported RM66.9m core earnings in 2Q13 and RM148.8m in 1H13, slightly below HLIB’s RM343.6m (43.3%) and consensus RM349.7m (42.6%). Expect stronger earnings in 2H13, on higher Nissan sales volume.

Deviations

None.

Dividends

Proposed gross interim dividend of 6 sen and special dividend of 9 sen, translating into net dividend of 11.25 sen. We have adjusted our FY13 net dividend assumption to 16 sen from 14 sen.

Highlights

2Q13 sales (-20.6% qoq) was affected by the general election, as consumers held back in anticipation of lower car prices. However, sales has improved since mid-June, where sales orders was >6k in June and July alone.

Management guided Nissan sales to hit 58k units in FY13 (we have assumed 56.2k), banking on the success of Almera as well as new launches of Serena Hybrid (July) and Grand Livina (Sept). Almera alone has contributed to 59% of Nissan’s 1H13 sales.

TCM has increased its exposure to JP¥ vs. US$ to 38:62 in 3Q13 from 71:29 in 1Q13. 2H13 operations will be fairly immune to the appreciated US$, as TCM has stocked up high inventory level (for the next 3 months) and locked in the exchange rates (using plain vanilla derivatives).

However, TCM will face margin deterioration in FY14, should US$ remain high. Management guided earnings to drop by 16-17% if exchange rate stayed at MYR3.30/US$. HLIB is expecting MYR to stay at current level in FY14.

Indochina operation recorded loss before tax of RM10m (Vietnam: RM7.9m) in 1H13. Danang manufacturing plant has started production in June and only expected to breakeven at 5,000 units p.a. (currently around 3,000 p.a.)

Risks

• Prolonged tightening of banks’ HP rules.
• Slowdown in the Malaysian economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

We cut FY13 earnings forecast marginally by 2.1%, and FY14-15 by 12.5% and 11.3% respectively, to account for MYR depreciation and potentially lower car sales.

Rating

Hold

Positives –

• Strategic expansion plan into fast growing Indochina market.
• Increase plant utilization from contract assembly.

Negatives –

• Tightening of bank’s lending rules.
• Relatively underdeveloped Indochina’s automotive market.
• Weakening of MYR.
• Illiquid counter.

Valuation

Cut to hold with lower Target Price of RM6.40 (from RM7.30), after adjusting for higher input cost in 2014.

Source:Hong Leong Investment Bank Research - 30 Aug 2013