Results

• Reported RM23.8m core earnings in 1Q15, above HLIB’s expectations of only RM30m for FY15 (78.7%), but below consensus of RM132.0m (18.0%).

Deviations

• Higher than expected margins from new contributions of SUV X-Trail.

Dividends

• None.

Highlights

• 1Q15 revenue improved to RM1.57bn (+24.5% yoy; 24.1% qoq) on the back of higher Nissan sales and improved product mix (attributed to new launch SUV X-Trail).

• Despite higher yoy revenue, 1Q15 EBITDA margin declined to 5.3% (from 7.8% in 1Q14) due to depreciated RM (against USD) and higher sales and distributional costs (marketing & promotional offers). Nevertheless, EBITDA margin showed improvement qoq (3.2% in 4Q14) on better sales mix.

• Similarly, 1Q15 financial division showed lower yoy EBITDA at RM7.1m (from RM7.3m in 1Q14) on higher cost of fundings, but improvement qoq (from RM2.2m in 4Q14) on higher revenue and lower provisions.

• Nissan sales in IndoChina market had improved to 965 units (+34.4% yoy; +39.1% qoq) after the tax issues being sorted out. However, we believe the oversea operations remained in the red due to high start-up costs.

• We expect stiff competition within the automotive sector for the remaining of FY15 which will eat into margins. The current strong sales of X-Trail will likely taper off in 2H15, affected by strong orders for Honda HRV (+CRV) and upcoming Mazda CX-3 (+facelift CX-5) in 2H15. The weakened RM will also impact TCM’s margin in FY15.

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 have increased FY15 earnings to RM71.0m (from RM30.0m), while earnings for FY16-17 relatively unchanged.

Rating

• Sell

Positives

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

Negatives

• Tightening of bank’s lending rules;
• Competitive domestic market;
• Underdevel oped Indochina’s automotive market ;
• Strengthening of US$; and
• Illiquid counter.

Valuation

• Maintained Sell with unchanged Target Price of RM2.60 based on unchanged 0.6x FY16 PB.

Source: Hong Leong Investment Bank Research - 14 May 2015