Results

Below Expectations - Reported RM42.0m core earnings in 1Q14, only achieved 13.6% of HLIB’s expectations and 13.2% of consensus.

Deviations

Lower than expected EBITDA margins and higher net finance expenses (financing for network upgrades and oversea manufacturing plants).

Dividends

None.

Highlights

1Q14 revenue declined to RM1.26bn (-12.3% yoy; -6.9% qoq) on the back of lower domestic Nissan sales (-18.7% yoy; -10.9% qoq), mainly affected by weak consumer sentiments (withholding purchases ahead of NAP 2014 announcement in mid-Jan 2014) and stiff competitions especially from Toyota (Vios) and Honda (City).

Nissan sales in IndoChina market continued to improve qoq to 718 units (including Myanmar contribution). We believe IndoChina operation remained in the red given high depreciation cost of Danang plant.

Consequently, 1Q14 EBITDA margin declined to 7.8% (10% in FY13) due to lower sales volume (higher fixed cost/unit), depreciated RM (against USD) and higher sales and distributional costs (marketing & promotional offers).

Financial division contributed higher EBITDA at RM7.3m (+49.2% yoy) on better loans mixture towards commercial cars, which command higher yields.

We expect stiff competition within the automotive sector in FY14 to eat into margins. Nissan targeted to (at least) maintain sales volume of 53.2k units in 2014, banking on new model Teana, Sylphy and CKD Serena Hybrid. The weakened RM will also impact TCM’s margin in FY14.

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 have cut FY14-16 earnings significantly by 35.3%, 15.0% and 11.2% respectively, after accounting for lower margins due to stiff competitions.

Rating

SELL

Positives –

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

Negatives –

• Tightening of bank’s lending rules.
• Competitive domestic market.
• Underdeveloped Indochina’s automotive market.
• Weakening of MYR.
• Illiquid counter.

Valuation

Cut to Sell with lower Target Price of RM4.90 (from RM5.74) based on unchanged 11x FY15 PE, after we cut earnings.

Source: Hong Leong Investment Bank Research - 15 May 2014