Results

• Below Expectations - Reported RM10.2m core earnings in 3Q14 and RM69.5m in 9M14, achieved 69.7% of HLIB’s expectations and 40.9% of consensus.

Deviations

• Lower than expected margins due to promotional expenses.

Dividends

• None.

Highlights

Despite stiff competitions, revenue improved by 5.7% QoQ (on the back of sales volume +3.7% QoQ), from new contributions of new Nissan Teana and Renault Fluence, as well as aggressive promotional campaigns (for Almera) to lower inventory levels (improve cash flow and working capital).

Consequently, 3Q14 EBITDA margin declined further to 5.5% (vs. 6.4% in 2Q14 and 7.8% in 1Q14) from the higher sales and marketing expenses.

Depreciation also accelerated further QoQ to RM29.4m in 3Q14, as TCM spent RM81.5m on capex in the quarter (mainly for refurbishment of existing sales centers and establishments of new 3S centers).

Financial division contributed higher EBITDA QoQ at RM4.4m in 3Q14 (vs. RM3.2m in 2Q14), due to higher hire purchase intake and insurance policy renewal.

We expect continued stiff competition within the automotive sector in 4Q14 and weaker RM to eat into margins. We gather that TCM is offering heavy discounts of up to RM9k for some of its models.

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 FY14 earnings by 14.3% (after adjustments for lower EBITDA margins due to heavy competitions and depreciating RM/US$), but maintained FY15-16 earnings.

Rating

HOLD

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

• In view of the fall in share price (dropped from RM5.50 since our downgrade in May), we upgrade TCM to Hold with unchanged Target Price of RM4.00 based on unchanged 11x FY15 PE, as we believe TCM share price should be supported by its BV/share of RM4.20.

Source: Hong Leong Investment Bank Research - 27 Nov 2014