Highlights/ Comments

9M13 strong earnings growth of +127% yoy was driven by strong sales of domestic Nissan car of +63.0% yoy (mainly attributed to Almera), as well as improved margins from higher economy of scales and the appreciation of RM (against JP¥).

In Oct, Nissan sales was noticeably affected by new Vios launched (16k orders), as its passenger cars sales dropped below the 2,000 level. The reception of recently launched new Grand Livina in end-Sep was also relatively weak.

The current high net gearing level of 56.3% was mainly due to high inventory (18k cars) and increased hire-purchases. TCM will issue ABS (to improve cash level) and reduce inventory level by pushing year-end sales (via promotions and discounts which is likely to affect 4Q13 margin).

The implementation of GST (Goods & Services Tax) replacing Sales Tax is unlikely to lower car pricing, as GST is charged on the whole value chain vs. Sales Tax which was only on the finished good (factory assembled car).

Management expects TIV to increase in 2014, as OEMs are likely to launch new models (pushing sales volume) ahead of the implementation of GST by 1 Apr 2015, given that GST will increase cost of living and affect disposable income, and in turn the demand for cars. Hence, there will be competitive pressure in 2014.

For FY14, TCM hopes to sustain yoy earnings based on 60k sales target (which we believe is relatively hard to achieve), from the full year contribution of Grand Livina and 3-4 new model launches such as new Navara, Sylphy, Teana, and hopefully Note, which TCM is in pricing discussion with Nissan Japan. However, the expected depreciation of RM will affect its margin by 2H14, as TCM replenish inventory.

9M13 Indochina operation suffered losses before tax of RM17.3m, mainly from depreciation charge on Danang plant (expecting RM20m for FY13). Indochina is suffering some setbacks as car markets are relatively weak despite the strong economy growth and government initiatives. TCM is scouting for contract assembling to improve utilization rate of Danang plant.

Risks

• Prolonged tightening on lending.
• Slowdown of Malaysia economy affecting car sales.
• Slow market development in Indochina, particularly Vietnam.
• Global automotive supply chain disruption.

Forecasts

Unchanged.

Rating

Hold

Positives – 1) Strategic expansion plan into fast growing Indochina market; and 2) Increase plant utilization from contract assembly.

Negatives – 1) Tightening of bank’s lending rules; 2) Relatively underdeveloped Indochina’s automotive market; 3) Weakening of MYR; and 4) Illiquid counter.

Valuation

We reiterate Hold recommendation with unchanged TP at RM6.12 based on 12x FY14 P/E.

Source: Hong Leong Investment Bank Research - 25 Nov 2013