Results

• Below Expectations - Reported core losses of RM3.4m in 4Q14, dragging down FY14 core earnings to RM66.1m, achieved 77.3% of HLIB’s expectations and 56.4% of consensus.

Deviations

• Lower than expected margins due to promotional expenses.

Dividends

• Proposed final single tier dividend of 3 sen, within our expectation of total 6 sen dividend for 2014.

Highlights

• 4Q14: Revenue improved 10% QoQ on the back of aggressive sales promotion to push sales volume and clear high inventory level. However, the aggressive sales and combined with the strengthening of US$ (higher import costs) during the quarter, has further deteriorated TCM’s EBITDA margins and posted losses for the quarter.

• FY14: Revenue dropped 8.4% yoy due to lower sales volume and aggressive sales promotions (lower pricings). Subsequently, margins was affected due to lower economy of scale and higher distribution and marketing expenses as well as higher input costs (US$ strengthening) especially during year end.

• Outlook in 2015: We expect continued stiff competition within the automotive sector in 2015 (especially in 1H15), given the negative consumer sentiments (higher cost of livings) and uncertainties towards the implementation of GST (by April 2015). The tighter lending guidelines will also affect loan approval processes. US$ appreciation posts higher import cost for CKD components, which may affect TCM margins.

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 FY15-16 earnings by 78.9% and 51.0% respectively in view of lower margins. Introduced FY17 earnings at RM162m.

Rating

• Trading 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.
• Strengthening of US$.
• Illiquid counter.

Valuation

• We downgrade TCM to Trading Sell with Lower Target Price of RM3.00 (from RM3.48) based on lower 0.7x (from 0.8x) FY16 P/B, as we expect continued earnings uncertainties and declining dividend payout in 2015.

Source: Hong Leong Investment Bank Research - 26 Feb 2015