Highlights / Comments

For 3Q14, earnings dropped further qoq by 41.2% mainly due to higher marketing and promotional expenses in the quarter in order to boost sales volume (to clear high inventory level).

For 9M14, earnings dropped 67.7% yoy due to lower sales volume and deteriorated margins. Out of 32.8k sales volume, 49.6% was Almera, followed by 16.6% Livina and 9.9% Navara Pickup. Almera was facing stiff competitions from relatively newer Toyota Vios and Honda City.

Guiding for continued weak earnings in 4Q14 and expecting continued tough market environment in 2015, mainly due to consumer uncertainty and expected higher cost of living (af fecting purchasing power).

Sales volume for 2014 is expected to fall behind its targeted 50k units (Oct YTD achieved 36.7k units). It expects sales volume to fall back to 40-42k units in 2015, supported by 3 new launches – Almera facelift (Jan), X -Trail new model (Jan) and Navara new model.

In respond to the weak sentiments, TCM has resorted to slow down inventory orders (lower inventory holding costs), cut operating and capital expenditures in 2015, and potentially dividend payout.

In Indochina, earnings remained in the red, given the weak car sales volume (partially affected by tax issues in Vietnam). 9M14 operation reported loss (before tax) of RM38m. Strategizing a turnaround, TCM plans to introduce new models into the market and secure more contract assemblies in order to improve plant utilization rates).

With exposure to US$ and JP¥ at 80:20, TCM will be exposed to the depreciat ion of RM/US$. It is in talks with principal Nissan Motor for potential subsidies/product repricing to lower its burden.

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

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

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

Source: Hong Leong Investment Bank Research - 28 Nov 2014