Highlights/ Comments

• TCM achieved commendable sales volume of 13.6k units for Nissan in 1Q15 (See Figure Below) attributable to new launched SUV – X-Trail (RM140k), while the passenger car segment sales remained lackluster, indicating disappointing demand for Almera facelift (launched Jan 2015).

• We believe that 1Q15 sales (except X-Trail) were driven by aggressive sales campaigns (discounts, rebates etc) due to stiff competitions and negative consumer sentiments.

• Furthermore, TCM’s 42.7% of COGS is exposed to US$.

• Combination of higher marketing cost and weakened RM (against US$), 1Q15 margins are likely to be disappointing. Looking forward, we do not expect meaningful rebound in sales and margin. We anticipate further consensus earnings downgrade post 1Q15 result by 13 May 2015.

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 keep our forecast unchanged pending result on 13 May.

Rating

SELL

Positives

• 1) Strategic expansion plan into fast growing Indochina market; and 2) Increase plant utilization from contract assembly.

Negatives

• 1) Tightening of bank’s lending rules ; 2) Competitive domestic market; 3) Underdeveloped Indochina’s automotive market; 4) Weakening of MYR; and 5) Illiquid counter.

Valuation

• Downgrade to SELL recommendation with lower Target Price of RM2.60 (rom RM3.00) based 0.6x FY16 P/B.

Source: Hong Leong Investment Bank Research - 11 May 2015