Results

Below Expectations - Reported RM17.3m core earnings in 2Q14 and RM59.3m in 1H14, achieved 29.8% of HLIB’s expectations and 23.7% of consensus.

Deviations

Lower than expected sales volume and margins.

Dividends

Declared 3 sen net interim dividend (vs. 4.5 sen last year).

Highlights

2Q14 revenue declined to RM1.1bn (-13.7% YoY; -4.7% QoQ) on the back of lower domestic Nissan sales volume (-11.7% YoY; -14.7% QoQ), due to stiff competitions, banks tightening measures and lack of new volume driver model. B-Segment Nissan Almera (launched Oct 2012) is relatively aged as compared to new Toyota Vios (launched Oct 2013) and Honda City (launched Mar 2014).

Consequently, 2Q14 EBITDA margin declined further to 6.4% (vs. 7.8% in 1Q14 and 10.3% in 2Q13) due to lower sales volume (higher fixed cost/unit) and exuberated by weaker RM and higher sales and distributional costs (marketing & promotional offers to push sales).

1H14 was also affected by higher depreciation and financing charges from the commencement of Danang manufacturing plant in June 2013 (previously interest expense was capitalized).

Financial division contributed lower EBITDA at RM3.2m in 2Q14 (-20.1% YoY, -55.6% QoQ), due to higher financing cost and lesser insurance policy renewal.

We expect continued stiff competition within the automotive sector in FY14 and weaker RM to eat into margins. Nissan is likely to miss its targeted sales volume of 53.2k units in 2014 (only 26.0k units in Jan-Jul period).

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 earnings significantly by 50.0% and FY15-16 by 17.8% and 18.6% respectively, after accounting for lower sales volume and 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

Maintained Sell Recommendation with lower Target Price of RM4.00 (from RM4.90) based on unchanged 11x FY15 PE, after we cut our earnings forecasts.

Source:Hong Leong Investment Bank Research - 25 Aug 2014