Highlights/ Comments

2Q14 earnings dropped substantially by -58.7% qoq and 74.1% yoy due to:

1) Lower domestic car sales volume (heavy competition especially B-Segment Almera being hit by new Toyota Vios and new Honda City). Newly launched Jazz in July will likely affect Nissan sales further in 2H14.

2) Margin compressions from lower volumes (economy of scales), higher marketing and promotional expenses (to drive sales and retain market share) and the depreciation of RM (against US$).

3) Weaker Vietnam operation, due to CBU import duty issues (sorted out only in Aug 2014), which has limited Vietnam sales (from depleting of existing CBU inventory) as well as negative production variances in TCIE (Danang manufacturing plant). YTD, Vietnam operation reported LBT (loss before tax) of RM24.5m (vs. RM7.9m in 1H13).

TCM expects continued tough domestic market competition for 2H14 with margin compression (from higher import costs and marketing expenses). TCM is banking on new Serena Hybrid CKD and X-Trail (both to be priced competitively) to retain its sales volume by end 2014, before Almera facelift coming in by 1H15. The A-Segment car has been deferred to 2017. The contract assembling volume is likely to increase further in 2015 and 2016 from new model contracting.

Due to the tough market condition, TCM is conserving cash for working capital by cutting the budgeted capex for 2014-15 to RM260m (from RM500m) and lowering dividend payout.

Management is also looking into restructuring the balance sheet, which may concentrate on off-balance sheet and asset-light business structure, to boost capital for future growth. Furthermore, it is contemplating to move its business model into more dealerships (currently 25% of sales), which may lower its capital requirements as well as boost sales.

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

Unchanged.

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

We reiterate Sell recommendation with unchanged TP at RM4.00 based on 11x FY15 P/E.

Source: Hong Leong Investment Bank Research- 29 Aug 2014